<PAGE> 1
REGISTRATION NO. 33-1705
811-4491
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- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 (X)
POST-EFFECTIVE AMENDMENT NO. 16 (X)
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 (X)
AMENDMENT NO. 18 (X)
</TABLE>
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
2800 POST OAK BLVD., HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 993-0500
NORI L. GABERT
VICE PRESIDENT AND ASSOCIATE GENERAL COUNSEL
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
Approximate Date of Proposed Public Offering: As soon as practicable following
effectiveness of this Registration Statement.
---------------------
It is proposed that this filing will become effective:
- - --- immediately upon filing pursuant to paragraph (b)
X on April 30, 1995 pursuant to paragraph (b)
- - --- 60 days after filing pursuant to paragraph (a)(i)
- - --- on (date) pursuant to paragraph (a)(i)
- - --- 75 days after filing pursuant to paragraph (a)(ii)
- - --- on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate check the following:
- - --- this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Exhibit Index required by Rule 483(a) under the Securities Act of 1933
is located at page of the manually signed copy of this Registration Statement.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE SECURITIES
ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940 AND,
PURSUANT TO PARAGRAPH (B)(2), REGISTRANT DID NOT FILE A RULE 24F-2 NOTICE FOR
ITS LAST FISCAL YEAR BECAUSE IT DID NOT SELL ANY SECURITIES PURSUANT TO SUCH
DECLARATION DURING SUCH FISCAL YEAR.
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<PAGE> 2
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITY BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT(1) PRICE(2) REGISTRATION FEE
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest
$0.01 par value............ 5,022,794 $12.40 $289,999 $100.00
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the offering price of $12.40 per share on April 12, 1995.
(2) This calculation is made pursuant to Rule 24e-2 under the Investment Company
Act of 1940. During the fiscal year ended December 31, 1994, 4,999,407
shares were redeemed or repurchased. No shares have been utilized for
reductions prior to this time and the balance of 4,999,407 shares are being
used for reduction at this time.
<PAGE> 3
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM PROSPECTUS CAPTION
- - ---------------------------------------------- -------------------------------------------
<C> <S> <C>
PART A
------
1. Cover Page................................. Cover Page
2. Synopsis................................... Prospectus Summary; Expense Synopsis
3. Condensed Financial Information............ Financial Highlights
4. General Description of Registrant.......... Investment Objective and Policies; The Fund
and Its Management; Investment Practices
and Restrictions
5. Management of the Fund..................... The Fund and Its Management
6. Capital Stock and Other Securities......... Multiple Pricing System; The Fund and Its
Management; Redemption of Shares;
Dividends, Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Offered....... Multiple Pricing System; Purchase of Shares
8. Redemption or Repurchase................... Redemption of Shares
9. Pending Legal Proceedings.................. Inapplicable
PART B STATEMENT OF ADDITIONAL INFORMATION CAPTION
- - ------ -------------------------------------------
10. Cover Page................................. Cover Page
11. Table of Contents.......................... Table of Contents
12. General Information and History............ General Information
13. Investment Objectives and Policies......... Investment Objective and Policies; Options,
Futures Contracts and Related Options;
Investment Restrictions
14. Management of the Registrant............... General Information; Trustees and Executive
Officers; Investment Advisory Agreement
15. Control Persons and Principal Holders of
Securities............................... Trustees and Executive Officers; Investment
Advisory Agreement
16. Investment Advisory and Other Services..... Investment Advisory Agreement; Distributor;
Transfer Agent; Portfolio Transactions
and Brokerage; Other Information
17. Brokerage Allocation and Other Practices... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities......... Purchase and Redemption of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Determination of Net Asset Value; Purchase
and Redemption of Shares; Multiple Pricing
System
20. Tax Status................................. Dividends, Distributions and Federal Taxes
21. Underwriters............................... Distributor
22. Calculation of Performance Data............ Prior Performance Information
23. Financial Statements....................... Financial Statements
</TABLE>
PART C
- - ------
Information required to be included in Part C is set forth under the
appropriate item in Part C of this registration statement.
<PAGE> 4
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AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
- - ------------------------------------------------------------------------------
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
May 1, 1995
American Capital Federal Mortgage Trust (the "Fund") is a mutual fund whose
investment objective is to seek to provide investors with a high current return
and relative safety of capital. The Fund invests primarily in mortgage-related
securities issued or guaranteed by an agency or instrumentality of the U.S.
Government. In order to hedge against changes in interest rates, the Fund may
purchase or write options on such securities and engage in transactions
involving interest rate futures contracts and options on such contracts.
There is no assurance that the Fund will achieve its investment objective.
This Prospectus tells investors briefly the information they should know
before investing in the Fund. Investors should read and retain this Prospectus
for future reference.
A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and contains
further information about the Fund. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at the
telephone number and address printed above. The Statement of Additional
Information is incorporated by reference into this Prospectus.
THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE SHARES OF THIS FUND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
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AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
- - ------------------------------------------------------------------------------
CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICE AGENT:
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
INVESTMENT ADVISER:
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
DISTRIBUTOR:
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
- - ------------------------------------------------------------------------------
TABLE OF CONTENTS
- - ------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary....... 2
Expense Synopsis......... 5
Financial Highlights..... 7
Multiple Pricing
System................. 9
Investment Objective and
Policies............... 11
Investment Practices and
Restrictions........... 18
The Fund and Its
Management............. 22
Purchase of Shares....... 23
Distribution Plans....... 31
Shareholder Services..... 32
Redemption of Shares..... 37
Dividends, Distributions
and Taxes.............. 39
Prior Performance
Information............ 41
Additional Information... 43
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or by the Distributor. This Prospectus does
not constitute an offering by the Distributor in any jurisdiction in which
such offering may not lawfully be made.
- - --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- - --------------------------------------------------------------------------------
SHARES OFFERED. Shares of Beneficial Interest.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
TYPE OF COMPANY. Diversified, open-end management investment company.
2
<PAGE> 6
INVESTMENT OBJECTIVE. The Fund seeks to provide a high current return and
relative safety of capital.
INVESTMENT POLICY. Invests primarily in mortgage-related securities issued or
guaranteed by an agency or instrumentality of the U.S. Government. In order to
hedge against changes in interest rates, the Fund may purchase or write options
on such securities and engage in transactions involving interest rate futures
contracts and options on such contracts. The Fund may also purchase or sell debt
securities on a forward commitment basis and enter into interest rate swaps and
may purchase or sell interest rate caps, floors and collars.
INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights."
RISK FACTORS. Since the value of debt securities owned by the Fund will
fluctuate depending upon market factors and inversely with prevailing interest
rate levels, the net asset value of shares of the Fund will fluctuate. The Fund
is not limited as to the maturities of the securities in which it may invest.
Debt securities with longer maturities generally tend to produce higher yields
and are subject to greater market fluctuation as a result of changes in interest
rates than debt securities with shorter maturities. See "Investment Objective
and Policies -- General." The Fund may invest in stripped mortgage-related and
mortgage-backed securities, which may be issued by agencies or instrumentalities
of the U.S. Government, or by private originators of, or investors in, mortgage
loans. Those securities that are issued by private originators may involve
greater risk than securities issued directly by the U.S. Government, its
agencies or instrumentalities. See "Investment Objective and Policies -- Zero
Coupon and Other Stripped Securities." The Fund may also invest in asset-backed
securities, which may be unsecured, and therefore entail certain risks not
presented by mortgage-backed securities. See "Investment Objective and
Policies -- Asset-Backed Securities." The Fund may also purchase or sell debt
securities on a forward commitment basis, purchase or sell options and engage in
transactions involving interest rate futures contracts and options on such
contracts and may lend its portfolio securities. The Fund may enter into
interest rate swaps and may purchase or sell interest rate caps, floors and
collars. Each of such activities may subject the Fund to additional risks. See
"Investment Practices and Restrictions -- Forward Commitments, Lending of
Securities, Options, Futures Contracts and Related Options and Interest Rate
Transactions." No assurance can be given as to the actual maturity of a
mortgage-related security because the mortgage loans underlying the security may
be prepaid by the obligor. Depending on market conditions, the Fund may be able
to reinvest prepayments passed through to it only at a lower yielding investment
rate. See "Investment Objective and Policies -- Federal Mortgage-Related
Securities." Shares of the Fund are not insured or guaranteed by the U.S.
Government, its agencies or instrumentalities or by any other person or entity.
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") serves as investment adviser to the Fund. The Adviser serves as
investment adviser to 50 investment company portfolios. See "The Fund and Its
Management."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
3
<PAGE> 7
MULTIPLE PRICING SYSTEM. The Fund offers two classes of shares to the general
public, each with its own sales charge structure: Class A shares and Class C
shares. At this time, the Fund offers Class B shares only to current Fund Class
B shareholders who have elected or may elect the option to reinvest dividends
and/or capital gains distributions in shares of the Fund (other share purchases
by such shareholders must be of Class A or Class C shares), and Class B
shareholders of other American Capital funds exchanging their Class B shares for
Class B shares of the Fund. See "Purchase of Shares" and "Shareholder Services."
Each class of shares represents interest in the same portfolio of investments of
the Fund. The per share dividends on Class B and Class C shares will be lower
than the per share dividends on Class A shares. See "Multiple Pricing System."
For information on redeeming shares see "Redemption of Shares."
CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 3.25% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."
CLASS B SHARES. The Fund has suspended sales to the public of Class B shares,
which are now available only to a limited group of investors. See "Purchase of
Shares -- Class B Shares." These shares are offered to the persons described
above at net asset value per share and are subject to a maximum contingent
deferred sales charge of three percent of redemption proceeds during the first
and second year, declining each year thereafter to zero percent after the fourth
year. See "Redemption of Shares." The Fund pays a combined annual distribution
fee and service fee of up to one percent of its average daily net assets
attributable to such class of shares. See "Purchase of Shares -- Class B Shares"
and "Distribution Plans." Class B shares will convert automatically to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Multiple Pricing System -- Conversion
Feature."
CLASS C SHARES. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of one percent on redemptions made
within one year of purchase. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent of its
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class C Shares" and "Distribution Plans." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."
DIVIDENDS AND DISTRIBUTIONS. Income dividends are declared each business day,
and paid monthly; any net short-term or long-term capital gains are distributed
at least annually. All dividends and distributions are automatically reinvested
in shares of the Fund at net asset value per share (without sales charge) unless
payment in cash is requested. A portion of the dividends and distributions paid
may constitute a return of capital for federal income tax purposes. See
"Dividends, Distributions and Taxes."
4
<PAGE> 8
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EXPENSE SYNOPSIS
- - ------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
CLASS A CLASS C
SHARES CLASS B SHARES SHARES
<S> <C> <C> <C>
- - ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge imposed
on purchases (as a
percentage of offering
price)...................... 3.25%(a) None None
Sales charge imposed on
dividend
reinvestments............... None None None
Deferred sales charge (as a
percentage of original
purchase price or redemption
proceeds, whichever is
lower)...................... None* 3% during the first 1% during the
and first year(b)
second year,
decreasing
1% annually to 0%
after
the fourth year(b)
Exchange fee(c)............... $5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management fees............... .50% .50% .50%
Rule 12b-1 fees(d)............ .24% 1.00%(f) 1.00%(f)
Other expenses(e)............. .57% .58% .57%
Total fund operating
expenses...................... 1.31% 2.08% 2.07%
</TABLE>
- - ------------
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 16.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- page
18.
(c) Not charged in certain circumstances. See "Shareholder
Services -- Systematic Exchange" and "-- Automatic Exchange" -- page 20.
(d) Up to 0.25% for Class A shares, and one percent for Class B and Class C
shares. See "Distribution Plans" -- page 19.
(e) See "The Fund and Its Management" -- page 14.
(f) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
* Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of one percent may
be imposed on certain redemptions made within one year of the purchase.
5
<PAGE> 9
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including, for Class A shares, the
maximum $32.50 front-end sales charge
and for Class B and Class C shares, a
contingent deferred sales charge
assuming (1) an operating expense ratio
of 1.31% for Class A shares, 2.08% for
Class B shares and 2.07% for Class C
shares, (2) a 5% annual return
throughout the period and (3) redemption
at the end of the period:
Class A............................... $ 45 $ 73 $102 $185
Class B............................... $ 62 $ 98 $129 $203**
Class C............................... $ 31 $ 65 $111 $240
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of the
period:
Class A............................... $ 45 $ 73 $102 $185
Class B............................... $ 21 $ 65 $112 $203**
Class C............................... $ 21 $ 65 $111 $240
- - -----------------------------------------------------------------------------------
</TABLE>
** Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares," "The Fund and Its Management" and
"Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption is
unrelated to the Fund's prior performance and is not a projection of future
performance. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
6
<PAGE> 10
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FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
(Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated)
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. This information should be read in conjunction with the
financial statements and notes thereto included in the Fund's Annual Report to
shareholders for the year ended December 31, 1994, which are incorporated by
reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------------------
EIGHT MAY 14,
MONTHS 1986 (1)
ENDED THROUGH
DECEMBER 31, APRIL
1994 1993 1992 1991 1990 1989 1988 1987 30, 1987
--------- --------- --------- -------- -------- --------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
Net asset value,
beginning of
period......... $12.42 $12.63 $ 12.99 $12.85 $12.88 $12.39 $12.82 $13.24 $13.99
--------- --------- --------- -------- -------- --------- ------- --------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Investment
income......... .62 .64 .93 1.15 1.32 1.29 1.32 .78 .94
Expenses........ (.14) (.11) (.14) (.17) (.173) (.165) (.16) (.10) (.15)
Expense
waiver......... .02 .01 .025 .025 -- -- -- -- --
--------- --------- --------- -------- -------- --------- ------- --------- --------
Net investment
income......... .50 .54 .815 1.005 1.147 1.125 1.16 .68 .79
Net realized and
unrealized
gains or losses
on
securities..... (.4817) (.1485)(4) (.417) .206 (.004) .4955 (.495) (.365) (.375)
--------- --------- --------- -------- -------- --------- ------- --------- --------
Total from
investment
operations..... .0183 .3915 .398 1.211 1.143 1.6205 .665 .315 .415
--------- --------- --------- -------- -------- --------- ------- --------- --------
LESS
DISTRIBUTIONS
Dividends from
net investment
income......... (.5383) (.6015) (.758) (1.071) (1.173) (1.1305) (1.095) (.70) (.76)
Distributions
from net
realized gain
on
securities..... -- -- -- -- -- -- -- (.035) (.405)
--------- --------- --------- -------- -------- --------- ------- --------- --------
Total
distributions... (.5383) (.6015) (.758) (1.071) (1.173) (1.1305) (1.095) (.735) (1.165)
--------- --------- --------- -------- -------- --------- ------- --------- --------
Net asset value,
end of
period......... $11.90 $12.42 $12.63 $12.99 $12.85 $12.88 $12.39 $ 12.82 $13.24
========= ========= ========= ======== ======== ========= ======= ========= ========
TOTAL
RETURN(3)...... .16% 3.15%(4) 3.15% 9.78% 9.50% 13.72% 5.14% 2.49% 1.82%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period
(millions)..... $41.2 $64.3 $103.7 $95.8 $32.3 $37.3 $48.3 $66.2 $88.8
Ratios to
average net
assets
Expenses....... 1.15% 1.03% 0.91% 1.16% 1.38% 1.32% 1.22% 1.15%(2) 1.02%(2)
Expenses,
without
waiver....... 1.31% 1.15% 1.12% 1.36% -- -- -- -- --
Net investment
income....... 4.75% 5.49% 6.36% 7.96% 9.11% 8.97% 9.00% 7.96%(2) 5.28%(2)
Net investment
income,
without
waiver....... 4.58% 5.37% 6.15% 7.66% -- -- -- -- --
Portfolio
turnover
rate........... 161% 102% 254% 293% 341% 314% 506% 38% 254%
</TABLE>
(Table continued on following page)
7
<PAGE> 11
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------- ------------------------
NOVEMBER 5, MAY 10,
YEAR ENDED 1991 (1) 1993 (1)
DECEMBER 31, THROUGH THROUGH
---------------------------------- DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 (5) 1994 1993 (5)
--------- --------- -------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............. $12.43 $ 12.64 $12.99 $12.99 $12.41 $12.60
--------- --------- -------- ------------ --------- ------------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................ .62 .67 .935 .12 .67 .44
Expenses......................................... (.22) (.20) (.24) (.03) (.24) (.14)
Expense waiver................................... .02 .01 .03 .02 .02 .02
--------- --------- -------- ------------ --------- ------------
Net investment income............................ .42 .48 .725 .11 .45 .32
Net realized and unrealized gains or losses on
securities...................................... (.4977) (.1845)(1) (.413) .036 (.5177) (.1914)(4)
--------- --------- -------- ------------ --------- ------------
Total from investment operations................. (.0777) .2955 .312 .146 (.0677) .1286
--------- --------- -------- ------------ --------- ------------
LESS DISTRIBUTIONS
Dividends from net investment income............. (.4423) (.5055) (.662) (.146) (.4423) (.3186)
Distributions from net realized gain on
securities...................................... -- -- -- -- -- --
--------- --------- -------- ------------ --------- ------------
Total distributions.............................. (.4423) (.5055) (.662) (.146) (.4423) (.3186)
--------- --------- -------- ------------ --------- ------------
Net asset value, end of period................... $11.91 $12.43 $12.64 $12.99 $11.90 $12.41
========= ========= ========= ============ ========= ============
TOTAL RETURN(3).................................. (.62%) 2.37% 2.46% 1.13% (.55%) 1.03%(4)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............. $18.4 $26.9 $38.4 $9.4 $5.8 $7.1
Ratios to average net assets
Expenses........................................ 1.91% 1.79% 1.60% 0.59%(2) 1.90% 1.47%(2)
Expenses, without waiver........................ 2.08% 1.91% 1.81% 1.84%(2) 2.07% 1.64%(2)
Net investment income........................... 3.99% 4.70% 5.44% 5.73%(2) 3.98% 3.79%(2)
Net investment income, without waiver........... 3.82% 4.58% 5.23% 4.48%(2) 3.81% 3.62%(2)
Portfolio turnover rate.......................... 161% 102% 254% 293% 161% 102%
</TABLE>
- - ------------
(1) The date of commencement of the offering of sales to the public.
(2) Ratios covering a period of less than a full calendar year have been
annualized for comparative purposes.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) During 1993, certain securities held by the Fund were mispriced. The Adviser
reimbursed the Fund to eliminate any loss to shareholders. Without the
reimbursement, the total return would have been lower by approximately 6.25
percentage points. See Note 2 to the Financial Statements.
(5) Per share data based on average month-end shares outstanding.
8
<PAGE> 12
- - ------------------------------------------------------------------------------
MULTIPLE PRICING SYSTEM
- - ------------------------------------------------------------------------------
The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 3.25% at the time of purchase. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."
CLASS B SHARES. The Fund has suspended sales of Class B shares to the general
public. Class B shares are now available only in connection with the
reinvestment of dividends and/or distributions by existing Class B shareholders
of the Fund and exchanges into the Fund by Class B shareholders of other
American Capital funds. See "Purchase of Shares." Class B shares are sold at net
asset value and are subject to a deferred sales charge if they are redeemed
within four years of purchase. Class B shares are subject to an ongoing service
fee at an annual rate of up to 0.25% of the Fund's aggregate average daily net
assets attributable to the Class B shares and an ongoing distribution fee at an
annual rate of up to 0.75% of the Fund's aggregate average daily net assets
attributable to the Class B shares. Class B shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the investment is
made. The ongoing distribution fee paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares. See "Purchase of Shares -- Class B Shares." Class B shares will
automatically convert to Class A shares six years after the end of the calendar
month in which the shareholder's order to purchase was accepted. See "Conversion
Feature" herein for discussion on applicability of the conversion feature to
Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase, Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will automatically convert to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the
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<PAGE> 13
imposition of any sales load, fee or other charge. The purpose of the conversion
feature is to relieve the holders of Class B shares and Class C shares that have
been outstanding for a period of time sufficient for the Distributor to have
been substantially compensated for distribution expenses related to the Class B
shares or Class C shares as the case may be, from the burden of the ongoing
distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares and Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares and Class C shares would occur, and shares might continue to be subject
to the distribution fee for an indefinite period which may extend beyond the
period ending six years or ten years, respectively, after the end of the
calendar month in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
C shares prior to conversion would be less than the initial sales charge on
Class A shares purchased at the same time, and to what extent such differential
would be offset by the higher dividends per share on Class A shares. To assist
investors in making this determination, the table under the caption "Expense
Synopsis" sets forth examples of the charges applicable to each class of shares.
In this regard, Class A shares may be more beneficial to the investor who
qualifies for reduced initial sales charges or purchases shares at net asset
value, as described herein under "Purchase of Shares -- Class A Shares." For
these reasons, the Distributor will reject any order of $1 million or more for
Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase Class C shares and have all their funds invested
initially, although remaining subject to ongoing distribution fees and, for a
four-year or one-year period, respectively, being subject to a contingent
deferred sales charge. Ongoing distribution fees on Class C shares will be
offset to the extent of the additional
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<PAGE> 14
funds originally invested and any return realized on these funds. However, there
can be no assurance as to the return, if any, which will be realized on such
additional funds. For investments held for ten years or more, the relative value
upon liquidation of the three classes tends to favor Class A, rather than Class
C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class C shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class C shares, from
the proceeds of the ongoing distribution fee and any contingent deferred sales
charge incurred upon redemption within one year of purchase. Sales personnel of
broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A or Class C shares. INVESTORS SHOULD UNDERSTAND THAT THE
PURPOSE AND FUNCTION OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING
DISTRIBUTION FEE WITH RESPECT TO THE CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and
Class C shares will be calculated in the same manner at the same time on the
same day, except that the distribution fees and any incremental transfer agency
costs relating to Class B or Class C shares will be borne by the respective
class. See "Dividends, Distributions and Taxes." Shares of the Fund may be
exchanged, subject to certain limitations, for shares of the same class of other
mutual funds advised by the Adviser. See "Shareholder Services -- Exchange
Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Trustees
of the Fund, pursuant to their fiduciary duties under the Investment Company Act
of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
- - ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- - ------------------------------------------------------------------------------
GENERAL. The investment objective of the Fund is to seek to provide high
current return and relative safety of capital. The Fund invests primarily in
mortgage-related securities issued or guaranteed by an agency or instrumentality
of the U.S. Government. See "Federal Mortgage -- Related Securities" below.
Under normal circumstances, at least 65% of the total assets of the Fund are
invested in such securities. The Fund may invest up to 35% of its assets in
mortgage-related securities which are not so guaranteed, mortgage-backed
securities, asset-backed securities, and U.S. Government securities. In order to
hedge against changes in interest rates, the Fund may purchase or write options
on
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<PAGE> 15
debt securities, and engage in transactions involving interest rate futures
contracts and options on such contracts. See "Investment Practices and
Restrictions -- Options, Futures Contracts and Related Options" and the
Statement of Additional Information for discussion of options, futures contracts
and related options. The Fund may also purchase or sell debt securities on a
forward commitment basis and enter into interest rate swaps and may purchase or
sell interest rate caps, floors and collars. See "Investment Practices and
Restrictions -- Forward Commitments and Interest Rate Transactions." There can
be no assurance that the Fund's investment objective will be achieved. The Fund
is not designed for investors seeking capital appreciation. Shares of the Fund
are not insured or guaranteed by the U.S. Government, its agencies or
instrumentalities or by any other person or entity.
For temporary defensive purposes, the entire portfolio of the Fund may be
invested in obligations of the U.S. Government, its agencies and
instrumentalities and repurchase agreements secured by such obligations. For a
description of repurchase agreements, see "Investment Practices and
Restrictions -- Repurchase Agreements."
Since the value of debt securities owned by the Fund will fluctuate depending
upon market factors and inversely with prevailing interest rate levels, the net
asset value of shares of the Fund will fluctuate. The Fund is not limited as to
the maturities of the securities in which it may invest. Debt securities with
longer maturities generally tend to produce higher yields and are subject to
greater market fluctuation as a result of changes in interest rates than debt
securities with shorter maturities. The potential for such fluctuation may be
reduced however to the extent that the Fund invests in adjustable rate mortgage
securities. See "Adjustable Rate Mortgage Securities." The Fund's current
operating policy is to maintain a portfolio duration within a range of six
months to five years. Duration is a measure of the expected life of a debt
security that was developed as a more precise alternative to the concept of
"term to maturity." Duration incorporates a debt security's yield, coupon
interest payments, final maturity and call features into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest the shorter the
maturity or the higher the yield to maturity of a debt security, the shorter its
duration.
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<PAGE> 16
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon resets. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At December 31, 1994, the average
maturity of the securities owned by the Fund was approximately 2.49 years and
the duration of the portfolio was approximately 2.13 years.
The Fund generally purchases debt securities at a premium over the principal
or face value in order to obtain higher current income. The amount of any
premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Fund's net asset value. Any such decline is realized for accounting purposes
as a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
FEDERAL MORTGAGE-RELATED SECURITIES. Mortgage loans made by banks, savings and
loan institutions, and other lenders are often assembled into pools, which are
issued or guaranteed by an agency or instrumentality of the U.S. Government,
though not necessarily by the U.S. Government itself. Interest in such pools are
what this Prospectus calls "federal mortgage-related securities."
Federal mortgage-related securities include, but are not limited to,
obligations issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). GNMA is a wholly-owned corporate
instrumentality of the United States whose securities and guarantees are backed
by the full faith and credit of the United States. FNMA, a federally chartered
and privately-owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the United States. The securities and guarantees of FNMA
and FHLMC are not backed, directly or indirectly, by the full faith and credit
of the United States. Although the Secretary of the Treasury of the United
States has discretionary authority to lend FNMA up to $2.25 billion outstanding
at any time, neither the United States nor any agency thereof is obligated to
finance FNMA's or FHLMC's operations or to assist FNMA or FHLMC in any other
manner.
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the security holders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the security holders frequently receive prepayments of principal,
in addition to the principal which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which bears a
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<PAGE> 17
relatively high rate of interest. This means that in times of declining interest
rates, some of the Fund's higher yielding securities might be converted to cash,
and the Fund will be forced to accept lower interest rates when that cash is
used to purchase additional securities. The increased likelihood of prepayment
when interest rates decline also limits market price appreciation of
mortgage-related securities. If the Fund buys mortgage-related securities at a
premium, mortgage foreclosures or mortgage prepayments may result in a loss to
the Fund of up to the amount of the premium paid since only timely payment of
principal and interest is guaranteed.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMS") are federal mortgage-related securities collateralized by mortgages
with adjustable, rather than fixed, interest rates. The ARMS in which the Fund
invests are issued primarily by GNMA, FNMA and FHLMC, and are actively traded in
the secondary market. The underlying mortgages which collateralize ARMS issued
by GNMA are fully guaranteed by the Federal Housing Administration or the
Veterans Administration. The underlying mortgages which collateralize ARMS
issued by FHLMC or FNMA are typically conventional residential mortgages
conforming to standard underwriting size and maturity constraints.
For certain types of ARMS in which the Fund may invest, the rate of
amortization of principal and interest payments changes in accordance with
movements in a predetermined interest rate index. The interest rates paid on
ARMS are generally readjusted at intervals of one year or less to an increment
over this predetermined interest rate index. The amount of interest due is
calculated by adding a specified additional amount (margin) to the index,
subject to limitations (caps and floors) on the maximum and minimum interest
charged to the mortgagor during the life of the mortgage or to the maximum and
minimum changes to that interest rate during a given period.
ARMS allow the Fund to participate in increases in interest rates through
periodic adjustments in the coupons of the underlying mortgages, resulting in
higher current yields and lower price fluctuations. The Fund, however, will not
benefit from increases in interest rates if they rise to the point where they
cause the current coupon to exceed the maximum allowable cap rates for a
particular mortgage. The resetting of the interest rates should cause the net
asset value of the Fund to fluctuate less dramatically than it would with
investments in long-term fixed-rate debt securities. However, during periods of
rising interest rates, changes in the coupon rate lag behind changes in the
market rate resulting in possibly a slightly lower net asset value until the
coupon resets to market rates. In addition, while there is less risk of decline
in the market value of ARMS during periods when interest rates rise, there may
be less potential for capital appreciation than other investments of similar
maturities due to the likelihood of increased prepayments.
The Fund currently seeks to maintain a more consistent and less volatile net
asset value than funds investing primarily in longer duration fixed rate
mortgage securities by investing a significant portion of its assets in ARMS and
in shorter duration fixed rate mortgage-related securities. See "Investment
Objective and Policies -- General" above.
OTHER MORTGAGE-RELATED AND MORTGAGE-BACKED SECURITIES. The Fund may also
invest in securities issued by certain private, nongovernment corporations, such
as financial institutions, if the securities are fully collateralized at the
time of issuance by
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<PAGE> 18
securities or certificates issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Two principal types of mortgage-backed securities
are collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICs).
CMOs are debt securities issued by U.S. Government agencies or by financial
institutions and other mortgage lenders and collateralized by a pool of
mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. The Fund intends to invest in
privately-issued CMOs and REMICs only if they are rated at the time of purchase
in the two highest grades by a nationally-recognized rating agency.
The Fund may also invest in private mortgage pass-through securities ("Private
Pass-Throughs") which are structured similarly to the GNMA, FNMA, and FHLMC
mortgage-related securities described above and are issued by originators of and
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Private Pass-Throughs are usually backed by a pool of
conventional fixed rate or adjustable rate mortgage loans. The Fund intends to
invest in such debt securities only if they are rated at the time of purchase in
the two highest grades by a nationally-recognized rating agency.
The Fund may also invest in mortgage-backed securities. A mortgage-backed
security is a general obligation of the issuer, which is additionally secured by
mortgage collateral. Such securities have a known maturity date and a
pre-determined cash flow. This category may include debt securities issued by a
public utility secured by mortgages on properties owned by the public utility.
The Fund intends to invest in such debt securities only if at the time of
purchase they are rated in the two highest grades by a nationally-recognized
rating agency.
U.S. GOVERNMENT SECURITIES. U.S. Government securities include U.S. Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and consist of U.S. Treasury bills (maturities of one year or less),
U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years).
ZERO COUPON AND OTHER STRIPPED SECURITIES. The Fund may also invest in the
interest only or principal only components of debt securities described above.
This includes "zero coupon" Treasury securities and stripped securities.
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<PAGE> 19
The Fund may invest in "zero coupon" Treasury securities which are U.S.
Treasury bills, notes, and bonds which have been stripped of their unmatured
interest coupons and receipts or certificates representing interests in such
stripped debt obligations. A zero coupon security pays no interest in cash to
its holder during its life although interest is accrued for federal income tax
purposes. Its value to an investor consists of the difference between its face
value at the time of maturity and the price for which it was acquired, which is
generally an amount significantly less than its face value (sometimes referred
to as a "deep discount" price). Investing in "zero coupon" Treasury securities
may help to preserve capital during periods of declining interest rates. For
example, if interest rates decline, GNMA Certificates owned by the Fund which
were purchased at greater than par are more likely to be prepaid, which would
cause a loss of principal. In anticipation of this, the Fund might purchase zero
coupon Treasury securities, the value of which would be expected to increase
when interest rates decline.
Currently the principal U.S. Treasury security issued without coupons is the
Treasury bill. The Treasury has also recently made wire transferable zero coupon
Treasury securities available. However, in the last few years a number of banks
and brokerage firms have separated ("stripped") the principal portions
("corpus") from the coupon portions of the U.S. Treasury bonds and notes and
sold them separately in the form of receipts or certificates representing
undivided interests in these instruments (which instruments are generally held
by a bank in a custodial or trust account).
Zero coupon Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate the
reinvestment risk and lock in a rate of return to maturity. Current federal tax
law requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund received no interest payment in cash on the security during
the year. For additional discussion of the tax treatment of zero coupon Treasury
securities, see "Dividends, Distributions and Taxes."
Stripped mortgage-related and mortgage-backed securities (hereinafter referred
to as "Stripped Mortgage Securities") are derivative multiclass mortgage
securities. Stripped Mortgage Securities may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing.
Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the
16
<PAGE> 20
other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the securities' yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities even if the security
is rated AAA or Aaa. Holders of PO securities are not entitled to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Current federal tax law requires that a holder (such as the Fund) of
such securities accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the certificate during the year. Such securities may involve
greater risk than securities issued directly by the U.S. Government, its
agencies or instrumentalities.
Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The Trustees of the Fund will
establish guidelines and standards for determining whether a particular
government-issued IO or PO backed by fixed-rate mortgages is liquid. Generally,
such a security may be deemed liquid if it can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of the net asset value per share. Stripped Mortgage Securities,
other than government-issued IO and PO securities backed by fixed-rate
mortgages, are presently considered by the staff of the SEC to be illiquid
securities and thus subject to the Fund's limitation on investment in illiquid
securities.
ASSET-BACKED SECURITIES. Asset-backed securities are similar to
mortgage-backed securities. However, the underlying assets include assets such
as automobile and credit card receivables. The assets are securitized either in
a pass-through structure (similar to a mortgage pass-through structure) or in a
pay-through structure (similar to the CMO structure). The Fund may invest in
these and other types of asset-backed securities that may be developed in the
future. Although the collateral supporting asset-backed securities generally is
of a shorter maturity than mortgage loans and historically has been less likely
to experience substantial prepayments, no assurance can be given as to the
actual maturity of an asset-backed security because prepayments of principal may
be made at any time.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of the same type of
security interest in the related collateral. Credit card receivables are
generally unsecured and a number of state and federal consumer credit laws give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables, there
is a risk that the holders may not have either a proper or first security
interest in all of the obligations backing such receivables due to the large
number of vehicles involved in a typical issuance, and technical requirements
under state laws.
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<PAGE> 21
Therefore, recoveries on repossessed collateral may not always be available to
support payments on the securities. For a further discussion of the risks of
investing in asset-backed securities, see the Statement of Additional
Information.
The Fund will invest in asset-backed securities only if they are rated at the
time of purchase in the two highest grades by a nationally-recognized rating
agency. The Fund does not presently propose to invest more than ten percent of
its assets in asset-backed securities.
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INVESTMENT PRACTICES AND RESTRICTIONS
- - ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (e.g., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of a default by the other party. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds ten percent of the value of its net assets. In the event of the
bankruptcy of the seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and loss including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto, (b) possible lack of access to
income on the underlying security during this period, and (c) expenses of
enforcing its rights. See the Statement of Additional Information.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
FORWARD COMMITMENTS. The Fund may purchase or sell mortgage-related securities
and U.S. Government securities on a "when-issued" or "delayed delivery" basis
("Forward Commitments"). These transactions occur when securities are purchased
or sold by the Fund with payment and delivery taking place in the future,
frequently a month or more after such transaction. The price is fixed on the
date of the commitment, and the seller continues to accrue interest on the
securities covered by the Forward Commitment until delivery and payment takes
place. At the time of settlement, the market value of the securities may be more
or less than the purchase or sale price.
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<PAGE> 22
The Fund may either settle a Forward Commitment by taking delivery of the
securities or resell or repurchase a Forward Commitment on or before the
settlement date, in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure. Forward Commitments are not traded on
an exchange and thus may be less liquid than exchange traded contracts.
The Fund maintains a segregated account (which is marked to market daily) of
cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase or sell continues.
LENDING OF SECURITIES. The Fund may lend its portfolio securities to
broker-dealers and other financial institutions in an amount up to ten percent
of the net assets, provided that such loans are callable at any time by the
Fund, and are at all times secured by cash collateral that is at least equal to
the market value, determined daily, of the loaned securities. During the period
of the loan, the Fund receives the income on both the loaned securities and the
collateral and thereby increases its yield after payment of lending fees.
Lending portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the borrower
fail financially. Accordingly, loans of portfolio securities will only be made
to borrowers considered by the Adviser to be creditworthy.
PORTFOLIO TURNOVER. The Fund generally experiences a high rate of portfolio
turnover, which may vary from year to year. A 100% turnover rate would occur,
for example, if all the securities held by the Fund were replaced in a period of
one year. Higher portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund.
The higher portfolio turnover may also increase the recognition of short-term,
rather than long-term, capital gains. The rate of portfolio turnover is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
related options.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of the
Fund permit the Fund to invest in or write options, futures contracts and
related options.
The Fund presently expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of the Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of options, futures
contracts and related options.
Potential Risks of Options, Futures Contracts and Related Options. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to the
Fund, if the Adviser is not suc-
19
<PAGE> 23
cessful in employing such instruments in managing the Fund's investments, the
Fund's performance will be worse than if the Fund did not make such investments.
In addition, the Fund pays commissions and other costs in connection with such
investments, which may increase the Fund's expenses and reduce its return. The
Fund may write or purchase options in privately negotiated transactions ("OTC
Options") as well as listed options. OTC Options can be closed out only by
agreement with the other party to the transaction. Any OTC Options purchased by
the Fund will be considered an illiquid security. Any OTC Option written by the
Fund will be with a qualified dealer pursuant to an agreement under which the
Fund may repurchase the option at a formula price. Such options will be
considered illiquid to the extent that the formula price exceeds the intrinsic
value of the option. The Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value of the Fund's assets. In order to prevent
leverage in connection with the purchase of futures contracts by the Fund, an
amount of cash, cash equivalents or liquid high grade debt securities equal to
the market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the Custodian.
The Fund may not invest more than ten percent of its net assets in illiquid
securities and repurchase agreements which have a maturity of longer than seven
days. See "Investment Restrictions" below.
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and
may purchase or sell interest rate caps, floors and collars. The Fund expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Fund may also enter into
these transactions to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date. The Fund does not intend to use
these transactions as speculative investments and will not enter into interest
rate swaps or sell interest rate caps or floors where it does not own or have
the right to acquire the underlying securities or other instruments providing
the income stream the Fund may be obligated to pay. Interest rate swaps involve
the exchange by the Fund with another party of their respective commitments to
pay or receive interest, i.e., an exchange of floating rate payments for
fixed-rate payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
floor. An interest rate collar combines the elements of purchasing a cap and
selling a floor. The collar protects against an interest rate rise above the
maximum amount but foregoes the benefit of an interest rate decline below the
minimum amount. Interest rate swaps, caps, floors and collars will be treated as
illiquid securities and will, therefore, be subject to the Fund's investment
restriction limiting investment in illiquid securities. See the Statement of
Additional Information for further discussion on such interest rate
transactions.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid debt securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's cus-
20
<PAGE> 24
todian. If the Fund enters into an interest rate swap on other than a net basis,
the Fund would maintain a segregated account in the full amount accrued on a
daily basis of the Fund's obligations with respect to the swap.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund. The debt securities in which the Fund invests are traded in the
over-the-counter market. Such securities are generally traded on a net basis
with dealers acting as principal for their own accounts without a stated
commission, although the prices of the securities usually include a profit to
the dealers. It is the policy of the Fund to seek to obtain the best net result
taking into account such factors as price (including the applicable dealer
spread), the size, type and difficulty of the transaction involved, the firm's
general execution and operational facilities, the firm's risk in positioning the
securities involved, and the provision of supplemental investment research by
the firm. While the Fund seeks reasonably competitive dealer spreads, the Fund
will not necessarily be paying the lowest spread available. Brokerage
commissions are paid on transactions in listed options, futures contracts and
options thereon. The Adviser is authorized to place portfolio transactions with
broker-dealers participating in the distribution of shares of the Fund and other
American Capital mutual funds if it reasonably believes that the quality of the
execution and any commissions are comparable to that available from other
qualified firms. The Adviser is authorized to pay higher commissions to
brokerage firms that provide it with investment and research information than to
firms which do not provide such services if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser in managing the assets of other
advisory accounts as well as in the management of the assets of the Fund.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the U.S.
Government, its agencies or instrumentalities) or purchase more than ten
percent of the outstanding voting securities of any one issuer.
2. Borrow in excess of five percent of the market or other fair value of its
total assets, or pledge its assets to an extent greater than five percent
of the market or other fair value of its total assets. Any such borrowings
shall be from banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Deposits in escrow in connection with
the writing of covered or fully collateralized call or secured put options,
or in connection with the purchase or sale of futures contracts and related
options, are not deemed to be a pledge or other encumbrance.
3. Purchase an illiquid security if, as a result of such purchase, more than
ten percent of the Fund's net assets would be invested in such securities.
Illiquid securities are securities subject to legal or contractual
restrictions on resale, which include
21
<PAGE> 25
repurchase agreements maturing in more than seven days and any over-the-
counter options or other restricted securities purchased by the Fund.
4. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (a) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase and sell options to
the extent that the premiums paid for all such options owned at any time do
not exceed ten percent of its total assets and (c) engage in transactions
in interest rate futures contracts and related options provided that such
transactions are entered into for bona fide hedging purposes (or that the
underlying commodity value of the Fund's long positions do not exceed the
sum of certain identified liquid investments as specified in CFTC
regulations), provided further that the aggregate initial margin and
premiums do not exceed five percent of the fair market value of the Fund's
total assets, and provided further that the Fund may not purchase futures
contracts or related options if more than 30% of the Fund's total assets
would be so invested.
- - ------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- - ------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company. This type
of company is commonly known as a mutual fund. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
Eight Trustees have the responsibility for overseeing the affairs of the Fund.
The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines the
investment of the Fund's assets, provides administrative services and manages
the Fund's business and affairs. The Adviser together with its predecessors, has
been in the investment advisory business since 1926. As of March 31, 1995, the
Adviser presently provides investment advice to 47 investment company portfolios
with total net assets of approximately $16.4 billion.
The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by the Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than six percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.
Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chairman, Chief Executive
Officer and Director of
22
<PAGE> 26
the Distributor. Most other officers of the Fund are also officers and/or
directors of the Adviser.
The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Fund at an annual rate of 0.50% of the first $1 billion of net
assets; 0.475% of the next $1 billion of net assets; 0.45% of the next $1
billion of net assets; 0.40% of the next $1 billion of net assets; and 0.35% of
net assets in excess of $4 billion. Under the Advisory Agreement the Fund also
reimburses the Adviser for the costs of the Fund's accounting services, which
include maintaining its financial books and records and calculating its daily
net asset value. Operating expenses paid by the Fund include shareholder service
agency fees, distribution fees, service fees, custodial fees, legal and
accounting fees, the cost of reports and proxies to shareholders, Trustees'
fees, and all other business expenses not specifically assumed by the Adviser.
Advisory (management) fee, and total operating expense ratios are shown under
the caption "Expense Synopsis" herein.
Ted Mundy is primarily responsible for the day-to-day management of the Fund's
investment portfolio. Mr. Mundy is Vice President of the Fund and has been
primarily responsible for managing the Fund's investment portfolio since June
30, 1994. From September, 1990 to June, 1994, Mr. Mundy was a portfolio manager
with AMR Investment Services, Inc. Prior to that he was a trader with Howard,
Weil, Labouisse and Friedrichs.
- - ------------------------------------------------------------------------------
PURCHASE OF SHARES
- - ------------------------------------------------------------------------------
GENERAL
The Fund offers two classes of shares to the general public. Class A shares
are sold with an initial sales charge and Class C shares are sold without an
initial sales charge and are subject to a contingent deferred sales charge upon
certain redemptions. See "Multiple Pricing System" for a discussion of factors
to consider in selecting which class of shares to purchase. Contact the Service
Department at (800) 421-5666 for further information and appropriate forms. At
this time, the Fund offers Class B shares only to current Fund Class B
shareholders who have elected or may elect the option to reinvest dividends and/
or capital gains distributions in shares of the Fund (other share purchases by
such shareholders must be of Class A or Class C shares), and Class B
shareholders of other American Capital funds exchanging their Class B shares for
shares of the Fund. See "Shareholder Services."
Class A and Class C shares of the Fund are offered continuously for sale by
the Distributor and are available through authorized investment dealers. Initial
investments must be at least $500 and subsequent investments must be at least
$25. Both minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right
23
<PAGE> 27
to suspend the sale of the Fund's shares in response to conditions in the
securities markets or for other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application included in this Prospectus
and forwarding the application, through the designated dealer, to the
shareholder service agent, ACCESS Investor Services, Inc. ("ACCESS"). When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge which will vary depending on the
method of purchasing shares chosen by the investor, as shown in the tables
herein. Net asset value per share is determined once daily as of the close of
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.,
New York time) each day the Exchange is open. Net asset value per share for each
class is determined by dividing the value of the Fund's securities, cash and
other assets (including accrued interest) attributable to such class, less all
liabilities (including accrued expenses) attributable to such class by the total
number of shares of the class outstanding. U.S. Government and agency
obligations are valued at the last reported bid price. Listed options are valued
at the last reported sale price on the Exchange on which such option is traded,
or, if no sales are reported, at the mean between the last reported bid and
asked prices. Options for which market quotations are not readily available are
valued at a fair value under a method approved by the Trustees. Short-term
investments are valued in the manner described in the Notes to Financial
Statements in the Statement of Additional Information.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value (plus applicable Class A sales charges) after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be received prior to
such time. Orders of less than $500 are mailed by the dealer and processed at
the offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges
24
<PAGE> 28
and certain different shareholder service options available. See "Distribution
Plans" and "Shareholder Services -- Exchange Privilege." The net income
attributable to Class B and Class C shares and the dividends payable on Class B
and Class C shares will be reduced by the amount of the distribution fee and
incremental expenses associated with such distribution fee. Sales personnel of
broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on sales generated by the broker or
dealer during such programs. Also, the Distributor in its discretion may from
time to time, pursuant to objective criteria established by it, pay fees to, and
sponsor business seminars for, qualifying brokers, dealers or financial
intermediaries for certain services or activities which are primarily intended
to result in sales of shares of the Fund. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
DEALERS
SIZE OF AS % OF NET AS % OF (AS A % OF
INVESTMENT AMOUNT INVESTED OFFERING PRICE OFFERING PRICE)
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000........... 3.36% 3.25% 3.00%
$25,000 but less than
$249,999.................. 2.83% 2.75% 2.50%
$250,000 but less than
$499,999.................. 1.78% 1.75% 1.50%
$500,000 to $999,999........ 1.52% 1.50% 1.25%
$1,000,000 or more.......... (See herein) (See herein) (See herein)
- - ------------------------------------------------------------------------------
</TABLE>
No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales
25
<PAGE> 29
charge of one percent in the event of certain redemptions within one year of the
purchase. The contingent deferred sales charge incurred upon redemption is paid
to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: one percent on sales to $2 million,
plus 0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on
the excess over $5 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any such fund or an affiliate of
such subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of certain other participating American
Capital funds as
26
<PAGE> 30
described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first investment
pursuant hereto equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to one percent for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in
Participating Funds (as hereinafter defined) or American Capital Reserve
Fund, Inc. ("Reserve"). For such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of redemptions within
one year of the purchase other than redemptions required to make payments
to participants under the terms of the plan. The contingent deferred sales
charge incurred upon certain redemptions is paid to the Distributor in
reimbursement for distribution-related expenses. A commission will be paid
to dealers who initiate and are responsible for such purchases as follows:
one percent on sales to $5 million, plus 0.50% on the next $5 million,
plus 0.25% on the excess over $10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Portfolios
at net asset value to such groups at any time.
27
<PAGE> 31
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc., American Capital Enterprise Fund, Inc., American Capital Equity
Income Fund, Inc., American Capital Federal Mortgage Trust, American Capital
Global Managed Assets Fund, Inc. ("Global Managed"), American Capital Government
Securities, Inc., American Capital Government Target Series ("Government
Target"), American Capital Growth and Income Fund, Inc., American Capital Harbor
Fund, Inc., American Capital High Yield Investments, Inc. ("High Yield"),
American Capital Municipal Bond Fund, Inc. ("Municipal Bond"), American Capital
Pace Fund, Inc., American Capital Real Estate Securities Fund, Inc. ("Real
Estate"), American Capital Tax-Exempt Trust ("Tax-Exempt"), American Capital
Texas Municipal Securities, Inc. ("Texas Municipal"), American Capital U.S.
Government Trust for Income ("Government Trust"), American Capital Utilities
Income Fund, Inc. ("Utilities Income") and American Capital World Portfolio
Series, Inc. ("World Portfolio"). A person eligible for a volume discount
includes an individual; members of a family unit comprising husband, wife, and
minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for a reduced sales charge on
the basis of previous purchases and if sufficient information is furnished to
permit confirmation of such purchases.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the Funds over a 13-month period based on the total amount of intended
purchases plus the value of all shares of the Participating Funds previously
purchased and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If the goal is not achieved within
the period, the investor must pay the difference between the charges applicable
to the purchases made and the charges previously paid. The initial purchase must
be for an amount equal to at least five percent of the minimum total purchase
amount of the level selected. If trades not initially made under a Letter of
Intent subsequently qualify for a
28
<PAGE> 32
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application included in this Prospectus.
CLASS B SHARES
At this time, Class B shares are offered only in connection with the
reinvestment of dividends and/or distributions by current Class B shareholders
of the Fund or exchanges into the Fund by Class B shareholders of other American
Capital funds.
Class B shares are offered to the limited group of investors described above
at the next determined net asset value. Class B shares which are redeemed within
four years of purchase are subject to a contingent deferred sales charge at the
rates set forth in the following table charged as a percentage of the dollar
amount subject thereto. The charge is assessed on an amount equal to the lesser
of the then current market value or the cost of the shares being redeemed.
Accordingly, no sales charge is imposed on increases in net asset value above
the initial purchase price. In addition, no charge is assessed on shares derived
from reinvestment of dividends or capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchases
of shares, all payments during a month are aggregated and deemed to have been
made on the last day of the month.
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
- - ---------------------------------------------------------------------------
First..................................... 3%
Second.................................... 3%
Third..................................... 2%
Fourth.................................... 1%
Fifth..................................... None
</TABLE>
- - ------------------------------------------------------------------------------
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge, second, of shares held for over four years
or shares acquired pursuant to reinvestment of dividends or distributions and
third, of shares held longest during the four-year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvest-
29
<PAGE> 33
ment. With respect to the remaining 40 shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net asset value of $2
per share. Therefore, $400 of the $600 redemption proceeds is subject to a
deferred sales charge at a rate of three percent (the applicable rate in the
second year after purchase).
A commission or transaction fee of three percent of the purchase amount will
be paid to broker-dealers and other Service Organizations at the time of
purchase. Additionally, the Distributor may, from time to time, pay additional
promotional incentives in the form of cash or other compensation, to Service
Organizations that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. The charge is assessed on an
amount equal to the lower of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.25% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares and as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
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<PAGE> 34
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DISTRIBUTION PLANS
- - ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Trustees of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution charges
that a mutual fund may impose on a class of shares. The NASD Rules also limit
the aggregate amount which the Fund may pay for such distribution costs. Under
the Class A Plan the Fund pays a service fee to the Distributor at an annual
rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares. Under the Class B Plan and the Class C Plan,
the Fund pays a service fee to the Distributor at an annual rate of up to 0.25%
and a distribution fee at an annual rate of up to 0.75% of the Fund's aggregate
average daily net assets attributable to the Class B or Class C shares to
reimburse the Distributor for service fees paid by it to Service Organizations
and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to three
percent of the purchase price for Class B shares purchased by the clients of
broker/dealers and other Service Organizations and (ii) other distribution
expenses as described in the Statement of Additional Information. Under the
Class C Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class C shares as reimbursement for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.25% of the average daily net
assets of the Fund's Class C shares and (ii) other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
Plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plans. In their review of the Distribution
Plans, the Trustees are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
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<PAGE> 35
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-end
sales load and at the same time permit the Distributor to compensate Service
Organizations with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect to the Class A
shares of the Fund in that in both cases such charges provide for the financing
of the distribution of the Fund's shares.
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward, without
interest charges unless permitted under applicable SEC regulations, and may be
reimbursed by the Fund or its shareholders from payments received through
contingent deferred sales charges in future years and from payments under the
Class B Plan and Class C Plan so long as such Plans are in effect. For example,
if in a fiscal year the Distributor incurred distribution expenses under the
Class C Plan of $1 million, of which $500,000 was recovered in the form of
contingent deferred sales charges paid by investors and $400,000 was reimbursed
in the form of payments made by the Fund to the Distributor under the Class C
Plan, the balance of $100,000 would be subject to recovery in future fiscal
years from such sources. For the plan year ended June 30, 1994, the unreimbursed
expenses incurred by the Distributor and carried forward were approximately $1.3
million or 5.7% under the Class B Plan and $155,000 or 1.7% under the Class C
Plan.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
- - ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- - ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Share certificates are not issued except upon
shareholder request. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an
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<PAGE> 36
account in any of the Participating Funds listed under "Purchase of
Shares -- Class A Shares -- Volume Discounts," or Reserve, may receive
statements quarterly from ACCESS showing any reinvestments of dividends and
capital gains distributions and any other activity in the account since the
preceding statement. Such shareholders also will receive separate confirmations
for each purchase or sale transaction other than reinvestment of dividends and
capital gains distributions and systematic purchases or redemptions. Additions
to an investment account may be made at any time by purchasing shares through
authorized investment dealers or by mailing a check directly to ACCESS.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. The Fund has suspended sales of
Class B shares to the public; however current Fund Class B shareholders who have
elected the option to reinvest dividends and/or capital gains distributions in
shares of the Fund may continue to do so. Current Fund Class B shareholders who
have elected the option to be paid dividends and/or capital gains distributions
in cash may elect to reinvest such dividends and distributions in Class B shares
of the Fund.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP, and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
FUND TO FUND DIVIDENDS. A shareholder may, upon written request or by
completing the appropriate section of the application form in this Prospectus,
elect to have all dividends and other distributions paid on a Class A, Class B
or Class C account in the Fund invested into a pre-existing Class A, Class B or
Class C account in any of the Participating Funds listed under "Purchase of
Shares -- Class A Shares -- Volume Discounts" or Reserve.
Both accounts must be of the same class and of the same type, either
non-retirement or retirement. Any two non-retirement accounts can be used. If
the accounts are retirement accounts, they must both be for the same class and
of the same type of retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and
the benefit of the same individual. If the qualified pre-existing account does
not exist, the shareholder must establish a new
33
<PAGE> 37
account subject to minimum investment and other requirements of the fund into
which distributions would be invested. Distributions are invested into the
selected fund at its net asset value as of the payable date of the distribution
only if shares of such selected fund have been registered for sale in the
investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts"), other
than Government Target, may be exchanged for shares of the same class of any
other fund without sales charge, provided that shares of Corporate Bond, the
Fund, Global Managed, Government Trust, High Yield, Municipal Bond, Real Estate,
Tax-Exempt, Texas Municipal, Utilities Income and the Global Government
Securities Fund of World Portfolio are subject to a 30-day holding period
requirement. Shares of Government Target may be exchanged for Class A shares of
the Fund without sales charge. Class A shares of Reserve may be exchanged for
Class A shares of the Fund upon payment of the excess, if any, of the sales
charge rate applicable to the shares being acquired over the sales charge rate
previously paid. Shares of Reserve acquired through an exchange of Class B or
Class C shares may be exchanged only for the same class of shares of a
Participating Fund without incurring a contingent deferred sales charge. Shares
of any Participating Fund or Reserve that were not acquired in exchange for
Class B or Class C shares of a Participating Fund may be exchanged for shares of
any other Participating Fund if shares of that Participating Fund are available
for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Additional funds may be added from time to time as a
Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other
American Capital fund that offers such class of shares ("new shares") in an
amount equal to the aggregate net asset value of the original shares, without
the payment of any contingent deferred sales charge otherwise due upon
redemption of the original shares. For purposes of computing the contingent
deferred sales charge payable upon a disposition of the new shares, the holding
period for the original shares is added to the holding period of the new shares.
Class B or Class C shareholders would remain subject to the contingent deferred
sales charge imposed by the original fund upon their redemption from the
American Capital complex of funds. The contingent deferred sales charge is based
on the holding period requirements of the original fund.
The Fund has suspended sales of Class B shares, however Class B shareholders
of other American Capital funds may exchange their Class B shares of such other
funds for Class B shares of the Fund.
Shares of the Fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information.
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<PAGE> 38
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. VKAC
and its subsidiaries, including ACCESS (collectively, "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Exchanges are effected at the net asset value per
share next calculated after the request is received in good order with
adjustment for any additional sales charge. See "Purchase of Shares" and
"Redemption of Shares." If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except fund to
fund dividends) and dealer of record as the account from which shares are
exchanged, unless otherwise specified by the shareholder. In order to establish
a systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must file a
specific written request. The Fund reserves the right to reject any order to
acquire its shares through exchange, or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
under "Shareholder Services -- Exchange Privilege" will be waived for such
systematic exchanges. Additional information on how to establish this option is
available from the Distributor.
AUTOMATIC EXCHANGE. The exchange fee described above under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the Service
Department at (800) 421-5666 for further information on how to utilize this
option.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose shares
in a single account total $5,000 or more may establish a withdrawal plan on a
quarterly, semi-annual or annual basis. This plan provides for the orderly use
of the entire account, not only the
35
<PAGE> 39
income but also the capital, if necessary. Each withdrawal constitutes a
redemption of shares on which any capital gain or loss will be recognized. The
plan holder may arrange for monthly, quarterly, semi-annual, or annual checks in
any amount not less than $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan established on
a form made available by the Fund. See "Shareholder Services -- Retirement
Plans."
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY CHECK
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A shares. Any
gain or loss realized on the sale of Class A shares is a taxable event. See
"Redemption of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any
36
<PAGE> 40
time by the Fund or State Street Bank. Retirement Plans and accounts that are
subject to backup withholding are not eligible for the privilege. A "stop
payment" system is not available on these checks. See the Statement of
Additional Information for further information regarding the establishment of
the privilege.
- - ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- - ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized dealer.
Orders received from dealers must be at least $500 unless transmitted via the
FUNDSERV network. The redemption price for such shares is the net asset value
next calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain
redemptions of Class A shares made within one year of purchase for investments
of $1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for the distribution-related expenses. See
"Purchase of Shares." A custodian of a retirement plan account may charge fees
based on the custodian's fee schedule.
The request for redemption must be signed by persons in whose names the shares
are registered. Signatures must conform exactly to the account registration. If
the proceeds of the redemption would exceed $50,000, or if the proceeds are not
to be paid to the record owner at the record address, or if the record address
has changed within the previous 60 days, signature(s) must be guaranteed by one
of the following: a bank or trust company; a broker-dealer; a credit union; a
national securities exchange, registered securities association or clearing
agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it does so if a special request is made to
ACCESS. In the case of shareholders holding certificates, the certificates for
the shares being redeemed must accompany the redemption request. In the event
the redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator, and the name and title of the individual(s)
authorizing such redemption is not shown in the account registration, a copy of
the corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 60 days must accompany the redemption
request. IRA redemption requests should be sent to the IRA custodian to be
forwarded to the share-
37
<PAGE> 41
holder service agent. Where Van Kampen American Capital Trust Company serves as
IRA custodian, special IRA, 403(b)(7), or Keogh distribution forms must be
obtained from and be forwarded to Van Kampen American Capital Trust Company,
P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payments may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value of less
than $250 if this results from shareholder withdrawals and not from market
decline. Three months advance notice of any such involuntary redemption is
required, and the shareholder is given an opportunity to purchase the required
value of additional shares at the next determined net asset value without sales
charge. Any applicable contingent deferred sales charge will be deducted from
the proceeds of this redemption.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits shareholders and the dealer representative of
record to redeem shares by telephone and to have redemption proceeds sent to the
address of record for the account or to the bank account of record as described
below. To establish such privilege, a shareholder must complete the appropriate
section of the application form in this Prospectus or call the Fund at (800)
421-5666 to request that a copy of the Telephone Redemption Authorization form
be sent to them for completion. To redeem shares, contact the telephone
transaction line at (800) 421-5684. Van Kampen American Capital and the Fund
employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures requiring
certain personal identification information prior to acting upon telephone
instructions, tape recording telephone communications, and providing written
confirmation of instructions communicated by telephone. If reasonable procedures
are employed, neither Van Kampen American Capital nor the Fund will be liable
for following instructions which it reasonably believes to be genuine. Van
Kampen American Capital and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. Telephone redemptions may not be available if the shareholder cannot
reach ACCESS by telephone, whether because all telephone lines are busy or for
any other reason; in such case, a shareholder would have to use the Fund's
regular redemption procedure previously described. Requests received by ACCESS
prior to 4:00 p.m., New York time, on a regular business day will be processed
at the net asset value per share determined that day. These privileges are
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
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<PAGE> 42
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 60 days prior to a
telephone redemption request. Proceeds from redemptions are expected to be wired
on the next business day following the date of redemption. The Fund reserves the
right at any time to terminate, limit or otherwise modify this redemption
privilege.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by Van
Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.
- - ------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- - ------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Income dividends are paid each business day, and
distributed monthly. The daily dividend is a fixed amount determined at least
monthly which is expected not to exceed the net income of the Fund for the month
divided by the number of business days in the month. Shares become entitled to
dividends on the day ACCESS receives payment for the shares, and remain entitled
to dividends through the day before such shares are processed for payment on
redemption. Therefore, if a dealer delays forwarding to ACCESS payment for
shares which an investor has made to the dealer, this will in effect cost the
investor money because it will delay the date upon which he becomes entitled to
dividends. Unless the shareholder instructs otherwise, dividends and capital
gains distributions are automatically applied to purchase additional shares of
the Fund at the next determined net asset value. See "Shareholder
Services -- Reinvestment Plan."
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
higher incremental transfer agency fees applicable to such classes of shares.
Any taxable net realized short-term or long-term capital gains will be
distributed to shareholders at least annually. Since the capital loss carry
forward and unrealized depreciation of securities totaled about $2.96 per share
at December 31, 1994, no capital gain distributions are presently anticipated.
39
<PAGE> 43
In computing interest income the Fund does not amortize premiums paid on the
purchase of debt securities. Thus in the case of mortgage-related and other U.S.
Government securities purchased at a premium, interest income is greater than it
would be if the premiums were amortized.
Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents, in substance, a return of capital to the
investor even though subject to income taxes as discussed below.
TAXES. The Fund has qualified and intends to continue to qualify as a
regulated investment company under the Code. By qualifying as a regulated
investment company, the Fund is not subject to federal income taxes to the
extent it distributes its net investment income and net realized capital gains.
Shareholders not subject to tax on their income will not, however, be required
to pay tax on amounts distributed to them. However, shareholders normally are
subject to federal income tax, and any applicable state or local income taxes,
on the dividends and distributions received from the Fund.
There are differences between federal income tax regulations and the generally
accepted accounting principles adopted by the Fund. For example, year-end
marking to market on certain options and futures contracts generally are
recognized for tax purposes but not for accounting purposes and certain
adjustments are made for tax purposes for repayments on mortgage-related
securities. Since dividends and distributions may, from time to time, be paid by
the Fund based on earnings recognized for accounting purposes, a portion of such
dividends and distributions may constitute a return of capital for federal
income tax purposes. If the amount of distributions paid by the Fund for any
fiscal year exceeds its investment company taxable income plus net realized
capital gains for the year, the excess is treated as a return of capital. Each
distribution paid for that year would be treated, in the same proportion, in
part as a distribution of taxable income and in part as a return of capital.
Shareholders are not subject to a current federal income tax on the part which
is treated as a return of capital, but their basis in Fund shares would be
reduced by that amount. This reduction of basis would operate to increase
capital gain (or decrease capital loss) upon subsequent sale or redemption of
shares.
Current federal tax law requires that a holder, such as the Fund, of a
stripped security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. As an investment company, the Fund must
pay out substantially all of its net investment income each year. Accordingly,
the Fund may be required to pay out as an income distribution each year an
amount which is greater than the total amount of cash interest the Fund actually
received. Such distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Adviser will select
which securities to sell. The Fund may realize a gain or loss from such sales.
In the event the Fund realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
40
<PAGE> 44
Shareholders are notified annually of the federal tax status of dividends and
any capital gains distributions. Long-term capital gains distributions
constitute long-term capital gains for federal income tax purposes.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked to market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the Fund
from writing over-the-counter options constitute short-term capital gains or
losses, unless the option is exercised, in which case the character of the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent the Fund has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents and
U.S. corporations. Investors should consult their tax advisers for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or citizenship tax consequences of receipt of
dividends and distributions from the Fund.
- - ------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- - ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five years and for the life of the Fund. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 3.25%); that all income dividends or
capital gains distributions during the period are reinvested in Fund shares at
net asset value; and that any applicable contingent deferred sales charge has
been paid. The Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
unrealized net capital gains or losses during the period. Since Class A shares
of the Fund were offered at a maximum sales charge at four percent prior to May
10, 1993, actual Fund total return would have been somewhat less than that
computed on the basis of the current maximum sales charge. Total return is based
on historical earnings and asset value fluctuations and
41
<PAGE> 45
is not intended to indicate future performance. No adjustments are made to
reflect any income taxes payable by shareholders on dividends and distributions
paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
To increase the yield of the Fund, the Adviser, may from time to time, limit
its management fee. A yield quotation which reflects an expense reimbursement or
subsidization by the Adviser will be higher than a yield quotation without such
expense reimbursement or subsidization. The Adviser may stop limiting its
management fees at any time without prior notice.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
3.25% and Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, the Dow Jones
Industrial Average Index, Standard & Poor's, NASDAQ, other appropriate indicies
of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the
42
<PAGE> 46
Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Business Week, Forbes,
Fortune, Institutional Investor, Investor's Business Daily, Kiplinger's Personal
Finance Magazine, Money, Mutual Fund Forecaster, Stanger's Investment Adviser,
U.S. News and World Report, USA Today and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement would also
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, do not reflect sales charges, the
inclusion of which would reduce Fund performance. The Fund will include
performance data for Class A, Class B and Class C shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover of this
Prospectus.
- - ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- - ------------------------------------------------------------------------------
ORGANIZATION OF THE FUND. The Fund was organized on September 9, 1985, under
the laws of the Commonwealth of Massachusetts and is a business entity commonly
known as a "Massachusetts business trust." It is authorized to issue an
unlimited number of Class A, Class B and Class C shares of beneficial interest
of $0.01 par value. Other classes of shares may be established from time to time
in accordance with provisions of the Fund's Declaration of Trust. Shares issued
by the Fund are fully paid, non-assessable and have no preemptive or conversion
rights.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. Each class of shares represents interests in the assets of the
Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions except that the distribution fees and/or service fees
related to each class of shares are borne solely by that class, and each class
of shares has exclusive voting rights with respect to provisions of the Fund's
Class A Plan, Class B Plan and Class C Plan which pertain to that class. An
order has been received from the SEC permitting the issuance and sale of
multiple classes of shares representing interests in the Fund's existing
portfolio. Shares issued are fully paid, non-assessable and have no preemptive
or conversion rights. There will normally be no annual meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by the shareholders,
at which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. Shareholders may, in accordance with the Declaration
of Trust, cause a meeting of
43
<PAGE> 47
shareholders to be held for the purpose of voting on the removal of Trustees.
Except as set forth above, the Trustees shall continue to hold office and
appoint successor Trustees.
The Declaration of Trust establishing the Fund, dated September 9, 1985, a
copy of which together with all amendments thereto (the "Declaration") is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "American Capital Federal Mortgage Trust" refers to the
Trustees under the Declaration collectively as Trustees, not as individuals or
personally; and provides that no Trustee, officer or shareholder of the Fund
shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or liability of the Fund
but the assets of the Fund only shall be liable.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, officers and employees to
buy and sell securities for their personal accounts subject to certain
restrictions. Persons with access to certain sensitive information are subject
to pre-clearance and other procedures designed to prevent conflicts of interest.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund
at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
SHAREHOLDER SERVICE AGENT. ACCESS, P. O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.
LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.
44
<PAGE> 48
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with
the following guidelines:
Account Type Give Social Security Number or Tax
Identification Number of:
Individual Individual
Joint (or Joint Tenant) Owner who will be paying tax
Uniform Gifts to Minors Minor
Legal Guardian Ward, Minor or Incompetent
Sole Proprietor Owner of Business
Trust, Estate, Pension
Plan Trust Trust, Estate, Pension Plan Trust (NOT
personal TIN of fiduciary)
Corporation, Partnership,
Other Organization Corporation, Partnership, Other
Organization
Broker/Nominee Broker/Nominee
STEP 2. If you do not have a TIN or you do not know your TIN, you must
obtain Form SS-5 (Application for Social Security Number) or Form SS-4
(Application for Employer Identification Number) from your local Social
Security or IRS office and apply for one. Write "Applied For" in the space on
the application.
STEP 3. If you are one of the entities listed below, you are exempt from
backup withholding and should not check the box on the Application in Section
2, Taxpayer Identification.
* A corporation
* Financial institution
* Section 501 (a) exempt organization (IRA, Corporate Retirement Plan,
403(b), Keogh)
* United States or any agency or instrumentality thereof
* A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof
* International organization or any agency or instrumentality thereof
* Registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
* Real estate investment trust
* Common trust fund operated by a bank under section 584 (a)
* An exempt charitable remainder trust, or a non-exempt trust described in
section 4947 (a) (1)
If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.
STEP 4. IRS PENALTIES -- If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable cause
and not willful neglect. If you fail to report interest, dividend or
patronage dividend income on your federal income tax return, you will be
treated as negligent and subject to an IRS 5% penalty tax on any resulting
underpayment of tax unless there is clear and convincing evidence to the
contrary. If you falsify information on this form or make any other false
statement resulting in no backup withholding on an account which should be
subject to backup withholding, you may be subject to an IRS $500 penalty and
certain criminal penalties including fines and imprisonment.
<PAGE> 49
AMERICAN CAPITAL
FEDERAL MORTGAGE TRUST
Prospectus
May 1, 1995
National Distributor
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Advisor
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
Transfer, Disbursing, Redemption
and Shareholder Service Agent
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256
Independent Accountants
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
ACCESS Investor Services, Inc.
(ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor,
Van Kampen American Capital Distributors, Inc.,
One Parkview Plaza
Oakbrook Terrace, IL 60181
American Capital C/O ACCESS
Federal Mortgage P.O. Box 418256
Trust Kansas City, MO 64141-9256
For investors seeking high current
return and relative safety of capital
from a portfolio of mortgage-related
securities, including adjustable rate
mortgage securities (ARMS).
[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./030 PRO-001
<PAGE> 50
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
MAY 1, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated May 1, 1995.
A Prospectus may be obtained without charge by calling or writing Van Kampen
American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION................................................................... 2
INVESTMENT OBJECTIVE AND POLICIES..................................................... 2
INVESTMENT RESTRICTIONS............................................................... 12
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 14
INVESTMENT ADVISORY AGREEMENT......................................................... 16
DISTRIBUTOR........................................................................... 17
DISTRIBUTION PLANS.................................................................... 18
TRANSFER AGENT........................................................................ 19
PORTFOLIO TURNOVER.................................................................... 19
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 20
DETERMINATION OF NET ASSET VALUE...................................................... 21
PURCHASE AND REDEMPTION OF SHARES..................................................... 21
EXCHANGE PRIVILEGE.................................................................... 25
CHECK WRITING PRIVILEGE............................................................... 26
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 26
PRIOR PERFORMANCE INFORMATION......................................................... 29
OTHER INFORMATION..................................................................... 30
FINANCIAL STATEMENTS.................................................................. 30
</TABLE>
<PAGE> 51
GENERAL INFORMATION
The Fund was organized as a trust under the laws of Massachusetts on
September 9, 1985.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than six percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc. Advantage Capital Corporation, a retail broker-dealer
affiliate of the Distributor, is a wholly owned subsidiary of VK/AC Holding,
Inc. See "The Fund and Its Management" in the Prospectus.
As of April 12, 1995, no person was known to hold of record or beneficially
five percent or more of the outstanding Class A, Class B or Class C shares of
the Fund except the following:
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS CLASS OF AMOUNT OF RECORD OF
OF HOLDER SHARES OWNERSHIP OWNERSHIP
- - ------------------------------------------------- -------- ---------------- ------------
<S> <C> <C> <C>
Smith Barney Inc. Class A 190,898 5.28%
11th Floor
388 Greenwich Street Class C 57,165 11.30%
New York, NY 10013-2375
First Union Brokerage Class B 168,611 12.82%
Services, Inc.
5th Floor
301 S. College St.
Charlotte, NC 28202-6000
National Financial Services, Inc. Class B 117,212 8.91%
200 Liberty One World Financial Center Class C 32,300 6.38%
New York, NY 10281-1003
Merrill Lynch Pierce Fenner Class C 63,153 12.48%
P.O. Box 45286
Jacksonville, FL 32232-5286
(1)Bear Stearns & Co. Inc. Class C 166,472 32.90%
One Metrotech Center North
Brooklyn, NY 11201-3872
Donaldson Lufkin Class C 28,974 5.73%
1 Pershing Plaza, 5th Floor
Jersey City, NJ 07399-0001
Van Kampen American Capital Trust Company Class A 626,759.453 17.35%
2800 Post Oak Blvd.
Houston, TX 77056
(2)Amalgamated Bank of NY Cust.
NY Hotel Trades Council Pension Fund
Amivest Discretionary Investment Manager Class A 193,456.158 5.36%
P.O. Box 0370
New York, NY 10276-0370
</TABLE>
- - ---------------
(1) Represents the aggregate of a number of accounts held of record by Bear
Stearns & Co. Inc. Certain individual accounts also represent the beneficial
ownership of over five percent of the outstanding shares of the Class.
(2) Such shares could also be deemed to be beneficially owned by the NY Hotel
Trades Counsel Pension Fund and its investment adviser, Amivest Corporation,
a Delaware corporation, 767 5th Avenue, 50th Floor, New York, New York
10153.
2
<PAGE> 52
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters discussed.
One type of mortgage-related securities in which the Fund invests are those
which are issued or guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. One such type
of mortgage-related security is a Government National Mortgage Association
("GNMA") Certificate. GNMA Certificates are backed as to principal and interest
by the full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association ("FNMA") Certificate. Principal and interest
payments of FNMA Certificates are guaranteed only by FNMA itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-related
security in which the Fund may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is backed
by FHLMC as to payment of principal and interest but, like a FNMA security, it
is not backed by the full faith and credit of the U.S. Government.
The Fund will seek to obtain return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums received from expired call and put options;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Fund is not designed for investors seeking capital appreciation.
Moreover, varying economic and market conditions may affect the value of and
yields on mortgage-related securities and opportunities for gains from an option
writing program. Accordingly, there is no assurance that the Fund's investment
objective will be achieved.
GNMA Certificates
Government National Mortgage Association. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Fund purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Fund will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the United States. GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by
3
<PAGE> 53
mortgagors and mortgage foreclosures will result in the return of a portion of
principal invested before the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate.
If mortgagors prepay their mortgages, the principal returned to
Certificate holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly one-quarter of one
percent more than high grade corporate bonds and one-half of one percent more
than U.S. Government and U.S. Government agency bonds. As the life of individual
pools may vary widely, however, the actual yield earned on any issue of GNMA
Certificates may differ significantly from the yield estimated on the assumption
of a twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
4
<PAGE> 54
FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semi-annually and return principal once a year in guaranteed
minimum payments. The expected average life of these securities is approximately
ten years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.
Collateralized Mortgage Obligations
Collateralized mortgage obligations are debt obligations issued generally
by finance subsidiaries or trusts which are secured by mortgage-backed
certificates, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain funds and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain funds and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-backed certificates; the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (e.g., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium or
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and are not insured or guaranteed
by GNMA, FHLMC, FNMA or any other governmental agency or instrumentality, or by
any other person or entity. The issuers of collateralized mortgage obligations
typically have no significant assets other than those pledged as collateral for
the obligations.
ASSET-BACKED SECURITIES
The Fund may invest a portion of its assets in asset-backed securities
rated at the time of purchase in the two highest grades by a
nationally-recognized rating agency. The rate of principal payment generally
depends on the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors.
Therefore, the yield may be difficult to predict and actual yield to maturity
may be more or less than the anticipated yield to maturity. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or affiliated entities, and the
amount of credit support provided to the securities.
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Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, such securities may
contain elements of credit support. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
due on the underlying pool is timely. Protection against losses resulting from
ultimate default enhances the likelihood of payment of the obligations on at
least some of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to broker-dealers and other financial institutions provided
that such loans are callable at any time by the Fund, and are at all times
secured by cash collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest on the loaned securities, while at
the same time earning interest on the collateral which will be invested in
short-term obligations. The Fund pays lending fees and custodial fees in
connection with loans of its securities. There is no assurance as to the extent
to which securities loans can be effected.
A loan may be terminated by the borrower on one business day's notice, or
by the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the consideration which can be
earned from such loans is believed to justify the attendant risks. The Fund
would not lend any portfolio securities to brokers affiliated with the Adviser.
On termination of the loan, the borrower is required to return the securities to
the Fund; any gain or loss in the market price during the loan would inure to
the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, whole or in part
as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (e.g., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period.
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Repurchase agreements are collateralized by the underlying debt securities and
may be considered to be loans under the Investment Company Act of 1940 as
amended (the "1940 Act"). The Fund will make payment for such securities only
upon physical delivery or evidence of book entry transfer to the account of a
custodian or bank acting as agent. The seller under a repurchase agreement will
be required to maintain the value of the underlying securities marked to market
daily at not less than the repurchase price. The underlying securities
(securities of the U.S. Government, or its agencies and instrumentalities), may
have maturity dates exceeding one year. The Fund does not bear the risk of a
decline in value of the underlying security unless the seller defaults under its
repurchase obligation. See "Investment Practices and Restrictions -- Repurchase
Agreements" in the Prospectus for further information.
FORWARD COMMITMENTS
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against or decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to sell continues. By entering into
a Forward Commitment sale transaction, the Fund forgoes or reduces the potential
for both gain and loss in the security which is being hedged by the Forward
Commitment sale.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis and will usually enter into
interest rate swaps on a net basis, e.g., the two payment streams are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or high-quality liquid debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian. If
the Fund enters into an interest rate swap on other than a net basis, the Fund
would maintain a segregated account in the full amount accrued on a daily basis
of the Fund's obligations with respect to the swap. Interest rate transactions
do not constitute senior securities under the 1940 Act when the Fund segregates
assets to cover the obligations under the transactions. The Fund will enter into
interest rate swap, cap or floor transactions only with counterparties approved
by the Trustees. The Adviser will monitor the creditworthiness of counterparties
to its interest rate swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction. To the extent the Fund sells (e.g., writes) caps, floors and
collars, it will maintain in a segregated account cash or high-quality liquid
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's net obligations with respect to
the caps, floors or collars. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Adviser is incorrect in its forecasts of the market values, interest rates and
other applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
used. The use of interest rate swaps,
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caps, collars and floors may also have the effect of shifting the recognition of
income between current and future periods.
These transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
CALL AND PUT OPTIONS
Call and put options on various U.S. Treasury notes and U.S. Treasury bonds
are listed and traded on Exchanges, and are written in over-the-counter
transactions. Call and put options on mortgage-related securities are currently
written or purchased only in over-the-counter transactions.
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and interest income
yields on portfolio securities vary as economic and market conditions change.
Actively writing options on portfolio securities is likely to result in a
substantially higher portfolio turnover rate than that of most other investment
companies. Higher portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund.
Writing Options. The purchaser of a call option pays a premium to the
writer (e.g., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund writes call
options either on a covered basis, or for cross-hedging purposes. A call option
is covered if the Fund owns or has the right to acquire the underlying
securities subject to the call option at all times during the option period.
Thus the Fund may write options on forward commitments or on mortgage-related or
other U.S. Government securities. An option is for cross-hedging purposes if it
is not covered, but is designed to provide a hedge against a security which the
Fund owns or has the right to acquire. In such circumstances, the Fund
collaterized the option by maintaining in a segregated account with the Fund's
Custodian, cash or U.S. Government securities in an amount not less than the
market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the writer (e.g., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or high grade debt securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out
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its position as a writer, but would provide an asset of equal value to its
obligation under the option written. If the Fund is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has written, it will be required to maintain the securities subject
to the call or the collateral securing the option until a closing purchase
transaction can be entered into (or the option is exercised or expires), even
though it might not be advantageous to do so.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (e.g., hedge) against
anticipated increases in the prices of securities it wishes to acquire. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Conversely, put options could be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. The Fund will not purchase call or put
options on securities if as a result, more than ten percent of its net assets
would be invested in premiums on such options.
The Fund may purchase either listed or over-the-counter options.
INTEREST RATE FUTURES CONTRACTS
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool."
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds, U.S. Treasury notes, U.S. Treasury bills and GNMA Certificates)
at a specified future time and at a specified price. Interest rate futures
contracts also include cash settlement contracts based upon a specified interest
rate such as the London interbank offering rate for dollar deposits, or LIBOR.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with its Custodian in
an account in the brokers' name an amount of cash, cash equivalents or liquid
high-grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, will be made on a daily basis as the price of the underlying
security fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as marking to market.
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For example, when the Fund has purchased a futures contract and the price
of the underlying security has risen, that position will have increased in
value, and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the value of the underlying security has declined, the
position would be less valuable, and the Fund would be required to make a
variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract would serve
as a temporary substitute for the purchase of individual securities, which may
be purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security, the sale of futures contracts would
substantially reduce the risk to the Fund of a market decline and, by so doing,
provide an alternative to the liquidation of securities positions in the Fund.
Ordinarily commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of mortgage-related and U.S. Government
securities.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in
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the securities underlying them, a correct forecast of general market trends by
the Adviser may still not result in a successful hedging transaction judged over
a very short time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or that the underlying
commodity value of the Fund's long futures positions not exceed the sum of
certain identified liquid investments) and (ii) that the Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed five percent of the fair market value of the Fund's assets. In order to
minimize leverage in connection with the purchase of futures contracts by the
Fund, an amount of cash, cash equivalents or liquid high grade debt securities
equal to the market value of the obligation under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with the
Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as it could sell, a futures contract. The purchase of call
options on futures contracts would be intended to serve the same purpose as the
actual purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security, when the use of an
option on a future would result in a loss to the Fund when the use of a future
would not.
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ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of limits.
An Exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. These position
limits may restrict the number of listed options which the Fund may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
Certain additional risks relate to the fact that the Fund will purchase and
sell options on mortgage-related securities. Since the remaining principal
balance of mortgage-related securities declines each month as a result of
mortgage payments, if the Fund has written a call and is holding such securities
as "cover" to satisfy its delivery obligation in the event of exercise, it may
find that the securities it holds no longer have a sufficient remaining
principal balance for this purpose. Should this occur, the Fund would purchase
additional mortgage-related securities from the same pool (if obtainable) or
replacements in the cash market in order to maintain its cover. A
mortgage-related security held by the Fund to cover an option position in any
but the nearest expiration month may cease to represent cover for the option in
the event of a decrease in the coupon rate at which new pools are originated. If
this should occur, the option would no longer be covered, and the Fund would
either enter into a closing purchase transaction or replace the mortgage-related
security with one which represents cover. In either case, the Fund may realize
an unanticipated loss and incur additional transaction costs.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following restrictions may not be
changed without the approval of the holders of a majority of its outstanding
shares. Such majority is defined as the lesser of (i) 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or (ii) more than 50% of the Fund's outstanding voting securities. The
percentage limitations need only be met at the time the investment is made or
other relevant action taken. In addition to the fundamental investment
limitations set forth in the Fund's Prospectus, the Fund shall not:
1. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition.
2. Make any investment in real estate, commodities or commodities
contracts, except that the Fund will invest in mortgage-related and
mortgage-backed securities and engage in transactions in futures
contracts and related options, as described in the Prospectus and
elsewhere in this Statement of Additional Information.
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3. Make any investment which would cause more than 25% of the market or
other fair value of its total assets to be invested in the securities
of issuers all of which conduct their principal business activities in
the same industry. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
4. Make loans of money or securities, except (a) by investment in
repurchase agreements in accordance with applicable requirements set
forth in the Fund's Prospectus or (b) by lending its portfolio
securities in amounts not to exceed ten percent of the Fund's total
assets, provided that such loans are secured by cash collateral that is
at least equal to the market value. See "Repurchase Agreements" and
"Lending of Securities" herein and "Investment Practices and
Restrictions" in the Prospectus.
5. Make short sales of securities, unless at the time of the sale the Fund
owns an equal amount of such securities. Notwithstanding the foregoing,
the Fund may make short sales by entering into forward commitments for
hedging or cross-hedging purpose and engage in transactions in options,
futures contracts and related options.
6. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. Transactions in forward commitments, options,
interest rate futures contracts and options on such contracts,
including deposits or payments of initial or maintenance margin in
connection with any such transaction, are not considered to be
purchases of securities on margin within the meaning of this
limitation.
7. Invest in securities of any company if, to the knowledge of the Fund,
any of its officers or trustees, or any officer or director of the
Adviser, owns more than one-half of one percent of the outstanding
securities of such company, and such officers, trustees, and directors
who individually own more than such amount together own more than five
percent of the outstanding securities of such issuer.
8. Invest in interests in oil, gas, or other mineral exploration or
development programs.
9. Underwrite securities of other companies, except insofar as the Fund
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Fund.
10. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
U.S. Government, its agencies or instrumentalities) or purchase more
than ten percent of the outstanding voting securities of any one
issuer.
11. Borrow in excess of five percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered or fully
collateralized call or secured put options, or in connection with the
purchase or sale of futures contracts and related options, are not
deemed to be a pledge or other encumbrance.
12. Purchase an illiquid security if, as a result of such purchase, more
than ten percent of the Fund's net assets would be invested in such
securities. Illiquid securities are securities subject to legal or
contractual restrictions on resale, which include repurchase agreements
maturing in more than seven days and any over-the-counter options or
other restricted securities purchased by the Fund.
13. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or
offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all
such options owned at the time do not exceed ten percent of its total
assets and (c) engage in transactions in interest rate futures
contracts and related options provided that such transactions are
entered into for bona fide hedging purposes (or that the underlying
commodity value of the Fund's long positions do not exceed the sum of
certain identified liquid investments as specified in CFTC
regulations), provided further that the aggregate initial
13
<PAGE> 63
margin and premiums do not exceed five percent of the fair market value of the
Fund's total assets, and provided further that the Fund may not purchase futures
contracts or related options if more than 30% of the Fund's total assets would
be so invested.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and executive officers and their principal occupations
for the past five years are listed below. All persons named as Trustees also
serve in similar capacities for other mutual funds advised by the Adviser, as
indicated below.
FERNANDO SISTO, Chairman of the Board and Trustee. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. Dean of
Graduate School, George M. Bond Professor and formerly Dean of Graduate School
and Chairman, Department of Mechanical Engineering, Stevens Institute of
Technology; Director, Dynalysis of Princeton (engineering research).(1)
J. MILES BRANAGAN, Trustee. 2300 205th Street, Torrance, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation (medical
equipment).(1)
RICHARD E. CARUSO, Trustee. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania, 19087. Chairman and Chief Executive Officer,
Integra LifeSciences Corporation (biotechnology/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of Art
(community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, LFC Financial Corporation
(leasing financing).(1)
ROGER HILSMAN, Trustee. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University.(1)
*DON G. POWELL, President and Trustee. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. President, Chief Executive Officer and Director of VK/AC
Holding, Inc., VKAC and the Adviser; Chairman, Chief Executive Officer and
Director of the Distributor.(1)(2)(4)
DAVID REES, Trustee. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)
**LAWRENCE J. SHEEHAN, Trustee. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to, and formerly Partner (1969-1994)
of the law firm of O'Melveny & Myers, legal counsel to the Fund.(1)(3)(5)
WILLIAM S. WOODSIDE, Trustee. 712 Fifth Avenue, 40th Floor, New York, New
York 10019. Vice Chairman of the Board, Sky Chefs, Inc. (airline food catering);
formerly Director, Primerica Corporation (currently known as The Travelers
Inc.); formerly Chairman of the Board and Chief Executive Officer, old Primerica
Corporation (American Can Company); formerly Director, James River Corporation
(paper products); Trustee and formerly President, Whitney Museum of American
Art; Chairman, Institute for Educational Leadership, Inc., Board of Visitors,
Graduate School of The City University of New York, Academy of Political
Science; Committee for Economic Development; Director, Public Education Fund
Network, Fund for New York City Public Education; Trustee, Barnard College;
Member, Dean's Council, Harvard School of Public Health; Member, Mental Health
Task Force, Carter Center.(1)
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(4)
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
IL 60181. Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.,
President, Chief Operating
14
<PAGE> 64
Officer and Director of Van Kampen American Capital Investment Advisory Corp.;
and Director of McCarthy, Crisanti & Maffei, Inc.
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)
TED MUNDY, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Portfolio Manager with the Adviser. From September, 1990 to June, 1994, Mr.
Mundy was a portfolio manager with AMR Investment Services, Inc. Prior to that
he was a trader with Howard, Weil, Labouisse and Friedrichs. (4)
RONALD A. NYBERG, Vice President, One Parkview Plaza, Oakbrook Terrace, IL
60181. Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc., Vice President of ACCESS Investor Services, Inc. and Van Kampen American
Services Inc., Vice President, General Counsel and Assistant Secretary of Van
Kampen American Capital Investment Advisory Corp., Senior Vice President and
General Counsel of the Adviser, Executive Vice President and General Counsel and
Director of VKAC Distributors, Inc.
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd. Houston, Texas
77056. Senior Vice President - Chief Investment Officer/Fixed Income Department
and Director of the Adviser; Executive Vice President and Director of VKAC.(4)
J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel and Compliance
Review Officer of the Adviser.(4)
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President, Chief Operating Officer
and Director of Van Kampen American Capital Services, Inc.; Executive Vice
President, Chief Operating Officer and Director of Van Kampen American Capital
Trust Company; Executive Vice President and Director of ACCESS.(4)
- - ---------------
* Trustee who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act by virtue of his affiliation with the Adviser.
** Trustee who is an interested person of the Fund and may be an interested
person of the Adviser within the meaning of the 1940 Act by virtue of his
affiliation with legal counsel of the Fund.
(1) A director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity Income
Fund, Inc., American Capital Federal Mortgage Trust, American Capital Global
Managed Assets, Inc., American Capital Government Securities, Inc., American
Capital Government Target Series, American Capital Growth and Income Fund,
Inc., American Capital Harbor Fund, Inc., American Capital High Yield
Investments, Inc., American Capital Life Investment Trust, American Capital
Municipal Bond Fund, Inc., American Capital Pace Fund, Inc., American
Capital Reserve Fund, Inc., American Capital Small Capitalization Fund,
Inc., American Capital Tax-Exempt Trust, American Capital Texas Municipal
Securities, Inc., American Capital U.S. Government Trust for Income,
American Capital Utilities Income Fund, Inc. and American Capital World
Portfolio Series, Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., and American Capital
Income Trust, American Capital Exchange Fund, investment companies advised
by the Adviser, and a trustee of Common Sense Trust, an open-end investment
company which the Adviser serves as adviser for nine of the Portfolios.
(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.
(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.
(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc., and FPA
Perennial Fund, Inc., investment companies not advised by the Adviser and
TCW Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.
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<PAGE> 65
The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Trustees between meetings except where board action is
required by law.
The Trustees and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the last fiscal year, the Trustees
who were not affiliated with the Adviser or its parent received as a group
$9,556 in trustees' fees from the Fund in addition to certain out-of-pocket
expenses. Such Trustees also received compensation for serving as trustees or
directors of other investment companies advised by the Adviser as identified in
the notes to the foregoing table. For legal services rendered during the fiscal
year, the Fund paid legal fees of $7,034 to the law firm of O'Melveny & Myers,
of which Mr. Sheehan is Of Counsel. The firm also serves as legal counsel to the
American Capital Funds listed in Footnote 1 above.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as directors or trustees noted
in Footnote 1 above. The compensation shown for the Fund and the total
compensation shown for the Fund and other related mutual funds are for the year
ended December 31, 1994, is set forth below. Mr. Powell is not compensated for
his service as Director because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED AND FUND
FROM AS PART OF FUND COMPLEX PAID TO
NAME OF PERSONS REGISTRANT EXPENSES DIRECTORS(1)(5)
- - ------------------------------------------------- ------------ ---------------- ---------------
<S> <C> <C> <C>
J. Miles Branagan................................ $1,410 -0- $64,000
Dr. Richard E. Caruso(2)(3)...................... 1,370 -0- 64,000
Dr. Roger Hilsman................................ 1,460 -0- 66,000
David Rees(3).................................... 1,410 -0- 64,000
Lawrence J. Sheehan.............................. 1,480 -0- 67,000
Dr. Fernando Sisto(2)(3)......................... 1,820 -0- 82,000
William S. Woodside(4)........................... 1,200 -0- 54,000
</TABLE>
- - ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $1,370 for Dr. Caruso and $960 for
Dr. Sisto.
(3) The cumulative deferred compensation paid by the Fund is as follows: Dr.
Caruso, $4,291; Mr. Rees, $5,378; and Dr. Sisto, $4,236.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, of the amounts reflected in the second and fourth
columns, $340 and $17,000, respectively, were paid by the registrant or the
registrant and the fund complex, as the case may be.
(5) Includes the following amounts for which the various funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed footnote 4 above).
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities. The Adviser obtains and evaluates economic, statistical and
financial information to formulate and implement the Fund's investment programs.
The Adviser also furnishes the services of the Fund's President and such
other executive and clerical personnel as are necessary to prepare the various
reports and statements and conduct the Fund's day-to-day operations. The Fund,
however, bears the cost of its accounting services, which include maintaining
its financial books and records and calculating its net asset value. The costs
of such accounting services include
16
<PAGE> 66
the salaries and overhead expenses of the Fund's Treasurer and the personnel
operating under his direction. Charges are allocated among the investment
companies advised or subadvised by the Adviser. A portion of these amounts were
paid to the Adviser or its parent in reimbursement of personnel, facilities and
equipment costs attributable to the provision of accounting services to the
Fund. The services provided by the Adviser are at cost. The Fund also pays
shareholder service agency fees, distribution fees, service fees, custodian
fees, legal and auditing fees, the costs of reports to shareholders, and all
other ordinary business expenses not specifically assumed by the Adviser. The
Agreement also provides that the Adviser shall not be liable to the Fund for any
actions or omissions if it acted without bad faith, negligence or reckless
disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a fee
payable monthly, computed at the following annual rates: (a) 0.50% of the first
$1 billion of average daily net assets; (b) 0.475% of the next $1 billion of
average daily net assets; (c) 0.45% of the next $1 billion of average daily net
assets; (d) 0.40% of the next $1 billion of average daily net assets; and (e)
0.35% of the average daily net assets in excess of $4 billion.
The Fund's average net assets are determined by taking the average of all
determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser will be reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of VK/AC
Holding, Inc. in connection with the purchase and sale of portfolio investments
less any direct expenses incurred by such subsidiary of VK/AC Holding, Inc., in
connection with obtaining such commissions, fees, brokerage or similar payments.
The Adviser agrees to use its best efforts to recapture tender solicitation fees
and exchange offer fees for the Fund's benefit and to advise the Trustees of the
Fund of any other commissions, fees, brokerage or similar payments which may be
possible for the Adviser or any other direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. to receive in connection with the Fund's
portfolio transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed 1.5% of the first $30
million of the Fund's average net assets, plus one percent of any excess over
$30 million, the Adviser's monthly compensation will be reduced by the amount of
such excess and that, if the amount of such excess exceeds the Adviser's monthly
compensation, the Adviser will pay the Fund an amount sufficient to make up the
deficiency, subject to readjustment during the Fund's fiscal year. Ordinary
business expenses do not include (1) interest and taxes, (2) brokerage
commissions, (3) certain litigation and indemnification expenses as described in
the Advisory Agreement, and (4) payments made by the Fund pursuant to the
distribution plans (described herein). The Advisory Agreement also limits the
extent to which the Adviser shall be liable to the Fund for acts or omissions.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Trustees, or (ii) by vote of a majority
of the Fund's outstanding voting securities; and (b) by the vote of a majority
of the Trustees who are not parties to the agreement or interested persons of
any such party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement provides that it shall terminate automatically if assigned
and that it may be terminated without penalty by either party on 60 days'
notice.
During the fiscal years ended December 31, 1992, 1993 and 1994 the Adviser
received $424,048, $463,588 and $280,713 respectively, in advisory fees from the
Fund. For such periods the Fund paid $66,713, $91,249 and $75,309 respectively,
for accounting services.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated December 20, 1994, the ("Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of the
Fund through dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and certain
17
<PAGE> 67
other costs, including the cost of sales literature and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Trustees or by a vote of a majority of the Fund's outstanding voting securities,
and (b) by the affirmative vote of a majority of the Trustees who are not
parties to the Underwriting Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Underwriting
Agreement provides that it will terminate if assigned, and that it may be
terminated without penalty by either party on 60 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal periods are shown in the chart below. Advantage Capital Corporation is an
affiliated dealer of the Distributor.
<TABLE>
<CAPTION>
DEALER REALLOWANCES
RECEIVED BY
TOTAL UNDERWRITING AMOUNT RETAINED ADVANTAGE CAPITAL
CAPITAL COMMISSIONS BY DISTRIBUTOR CORPORATION
- - ------------------------------------------ ------------------ --------------- -------------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1992 $ 557,607 $18,203 $ 76,019
Fiscal Year Ended December 31, 1993 $ 132,779 $16,515 $ 27,511
Fiscal Year Ended December 31, 1994 $ 55,691 $ 2,321 $ 6,301
</TABLE>
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" or "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to three percent of the purchase price of Class B
shares purchased by the clients of broker-dealers and other Service
Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, and (5) advertising and promotion expenses, including conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. With respect to the Class C Plan, authorized payments
by the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class C shares to reimburse the Distributor for (1) upfront
commissions and transaction fees of up to 0.75% of the purchase price of Class C
shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees paid to
broker-dealers and other Service Organizations in an amount up to 0.25% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, and (5) advertising and promotion
expenses, including conducting and organizing sales seminars, marketing support
salaries and bonuses, and travel-related expenses. Such reimbursements are
subject to the maximum sales charge limits specified by the National Association
of Securities Dealers, Inc. for asset-based charges.
18
<PAGE> 68
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements were approved by the Trustees, including a majority of the
Trustees who are not affiliated persons (as defined in the 1940 Act) of the Fund
and who have no direct or indirect financial interest in the operation of any of
the Plans or in any agreements related to each Plan ("Independent Trustees"). In
approving each Plan in accordance with the requirements of Rule 12b-1, the
Trustees determined that there is a reasonable likelihood that each Plan will
benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting securities of the
Fund. Any change in any of the Plans that would materially increase the
distribution or service expenses borne by the Fund requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plans are in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
For the fiscal year ended December 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $132,613 or 0.24% of the Class A shares' average
daily net assets. Such expenses were paid to reimburse the Distributor for
payments to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. For the fiscal year ended December 31, 1994, the
Fund's aggregate expenses under the Class B Plan were $222,471 or 1.00% of the
Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $166,853 for commissions and transaction
fees paid to broker-dealers and other Service Organizations in respect of sales
of Class B shares of the Fund and $55,618 for fees paid to Service Organizations
for servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended December 31, 1994, the Fund's aggregate expenses under the
Class C Plan were $76,165 or 1.00% of the Class C shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$57,124 for commissions and transaction fees paid to broker-dealers and other
Service Organizations in respect of sales of Class C shares of the Fund and
$19,041 for fees paid to Service Organizations for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended December 31, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$150,547 for these services. These services are provided at cost plus a profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for prior
years is shown under "Financial Highlights" in the Prospectus. The annual
turnover rate is expected to
19
<PAGE> 69
exceed 100%, which is higher than that of many other investment companies. A
100% turnover rate would occur if all the Fund's portfolio securities were
replaced during one year.
The Fund's portfolio turnover rate increased significantly from 1993 to
1994 because of increased trading activity resulting from a sharp increase in
short-term interest rates. This heightened volatility created additional trading
opportunities to manage treasury curve exposure. Additionally, late in the year,
dislocations among sectors (prices of adjustable rate mortgages were especially
favorable) presented opportunities which led to increased turnover.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund, as well as for the placement of its portfolio business and the negotiation
of any commissions, if any, paid on such transactions. It is the policy of the
Adviser to seek the best security price available with respect to each
transaction. In over-the-counter transactions, orders are placed directly with a
principal market maker unless the Adviser believes that a better price and
execution can be obtained by using a broker. Except to the extent that the Fund
may pay higher brokerage commissions for brokerage and research services, as
described below, on a portion of its transactions executed on securities
exchanges, the Adviser seeks the best security price at the most favorable
commission rate. In selecting broker-dealers and in negotiating commissions, the
Adviser considers the firm's reliability, the quality of its execution services
on a continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference may be given to firms which also
provide research services to the Fund or the Adviser. Consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. and
subject to seeking best execution and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund as a factor in
the selection of firms to execute portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the Advisory Agreement, the Trustees have
authorized the Adviser to cause the Fund to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Adviser. The Adviser intends that such higher commissions will
not be paid by the Fund unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with respect
to the accounts as to which it exercises investment discretion, (b) such payment
is made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the Advisory Agreement is not reduced as a result of the Adviser's receipt
of research services.
The Adviser places portfolio transactions for other advisory accounts,
including other mutual funds. Research services furnished by firms through which
the Fund effects its securities transactions may be used by the Adviser in
servicing all of their accounts; not all of such services may be used by the
Adviser in connection with the Fund. In the opinion of the Adviser, the benefits
from research services to each of the accounts, including the Fund, managed by
the Adviser cannot be measured separately. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions in
excess of the lowest available rate paid by each account for brokerage and
research services may vary. In the opinion of the
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Adviser, however, such costs to the Fund will not be disproportionate to the
benefits received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended December 31, 1992, 1993 and 1994 totalled $54,143, $12,080
and $-0-, respectively. No commissions were paid for research services during
the last fiscal year and no commissions were paid to affiliated brokers during
the last three years.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The types of mortgage-related and asset-backed securities in which the Fund
invests, as well as U.S. Government securities, are traded in the
over-the-counter market and are valued at the last available bid price. Such
valuations are based on quotations of one or more dealers that make markets in
the securities as obtained from such dealers or from a pricing service. Listed
options and options on futures contracts are valued at the last reported sale
price as of the close of the exchange or, if no sales are reported, at the mean
between the last reported bid and asked prices. Securities with a remaining
maturity of 60 days or less are valued on an amortized costs basis, which
approximates market value.
Securities (as well as over-the-counter options) and any other assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Such
valuations and procedures are reviewed periodically by the Trustees.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Class A shares and Class C shares of the Fund are sold in a continuous
offering and may be purchased on any business day through authorized dealers,
including Advantage Capital Corporation.
At this time, the Fund offers Class B shares only to current Fund Class B
shareholders who have elected or may elect the option to reinvest dividends
and/or capital gains distributions in shares of the Fund (other share purchases
by such shareholders must be of Class A or Class C shares), and Class B
shareholders of other American Capital funds exchanging their Class B shares for
Class B shares of the Fund.
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MULTIPLE PRICING SYSTEM
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B and Class C shares are sold at net asset value and
are subject to a contingent deferred sales charge. The three classes of shares
each represent interests in the same portfolio of investments of the Fund, have
the same rights and are identical in all respects, except that Class B and Class
C shares bear the expenses of the deferred sales arrangements, distribution
fees, and any expenses (including higher transfer agency costs) resulting from
such sales arrangements, and have exclusive voting rights with respect to the
Rule 12b-1 distribution plan pursuant to which the distribution fee is paid. As
set forth above, Class B shares are not currently being offered for sale to the
general public.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charge reflected in the sales charge table as shown in
the Prospectus under "Purchase of Shares -- Sales Charge Table" apply to
purchases of Class A shares of the Fund where the aggregate investment is
$25,000 or more. For purposes of determining eligibility for volume discounts,
spouses and their minor children are treated as a single purchaser, as is a
director or other fiduciary purchasing for a single fiduciary account. An
aggregate investment includes all shares of the Fund and all shares of certain
other participating American Capital mutual funds described in the Prospectus
(the "Participating Funds"), which have been previously purchased and are still
owned, plus the shares being purchased. The current offering price is used to
determine the value of all such shares. If, for example, an investor has
previously purchased and still holds shares of the Fund and shares of other
Participating Funds having a current offering price of $40,000, and that person
purchases $65,000 of additional Class A shares of the Fund, the charge
applicable to the $65,000 purchase would be 2.75% of the offering price. The
same reduction is applicable to purchases under a Letter of Intent as described
in the next paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN
ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE
BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE GIVEN IN WRITING WHEN
SUCH AN ORDER IS PLACED BY MAIL. The reduced sales charge may not be applied if
such notification is not furnished at the time of the order. The reduced sales
charge will also not be applied should a review of the records of the
Distributor or ACCESS fail to confirm the investor's representations concerning
his holdings.
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LETTER OF INTENT
Purchases of Class A shares of the funds described above under "Cumulative
Purchase Discount" made pursuant to the Letter of Intent and the value of all
shares of such Participating Funds previously purchased and still owned are also
included in determining the applicable quantity discount. A Letter of Intent
permits an investor to establish a total investment goal to be achieved by any
number of investments over a 13-month period. Each investment made during the
period receives the reduced sales charge applicable to the amount represented by
the goal as if it were a single investment. Escrowed shares totaling five
percent of the dollar amount of the Letter of Intent are held by ACCESS in the
name of the shareholder. A Letter of Intent may be back-dated up to 90 days in
order that any investments made during this 90-day period, valued at the
investor's cost, can become subject to the Letter of Intent. The Letter of
Intent does not obligate the investor to purchase the indicated amount. In the
event the Letter of Intent goal is not achieved within the 13-month period, the
investor is required to pay the difference between sales charges otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge, a
price adjustment is made by refunding to the investor in shares of the Fund, the
amount of excess sales charges, if any, paid during the 13-month period.
VOLUME DISCOUNTS
The schedule of volume discounts in the Prospectus applies to purchases of
Class A shares made at one time by any purchaser, which term includes (1) an
individual -- or an individual, his or her spouse and children under the age of
21 -- purchasing securities for his or her or their own account; (2) a trustee
or other fiduciary of a single trust estate or a single fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code (the
"Code")), although more than one beneficiary is involved; and (3) tax-exempt
organizations enumerated in Section 501(c)(3) or (13) of the Code.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC--Class A") of one percent is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC--Class A is imposed upon
redemption, the amount of the CDSC--Class A will be equal to the lesser of one
percent of the net asset value of the shares at the time of purchase, or one
percent of the net asset value of the shares at the time of redemption.
The CDSC--Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC--Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Code and
deferred compensation plans under Section 457 of the Code) required to obtain
funds to pay distributions to beneficiaries pursuant to the terms of the plans.
Such payments include, but are not limited to, death, disability, retirement, or
separation from service. No CDSC--Class A will be imposed on exchanges between
funds. For purposes of the CDSC--Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC--Class A rather than a front-end load sales charge. In determining whether
a CDSC--Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.
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Cumulative Purchase Discounts and Letters of Intent will apply to the net
asset value privilege. Also, in order to establish an amount of $1,000,000 or
more, a Qualified Purchaser may aggregate shares of American Capital Reserve
Fund, Inc. with shares of certain other participating American Capital funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC--CLASS B
AND C")
The CDSC--Class B and C may be waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC--Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC--Class B and C.
In cases of death or disability, the CDSC--Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC--Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC--Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge may be waived upon the tax-free rollover or transfer of assets
to another Retirement Plan invested in one or more of American Capital Funds; in
such event, as described below, the Fund will "tack" the period for which the
original shares were held onto the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC--Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also may be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC--Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC--Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
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systematically redeemed from such Fund without the imposition of a CDSC--Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC--Class B and C upon
such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC--Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the Fund, provided that the reinvestment is effected
within 120 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the
CDSC--Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC--Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practical for the Fund to fairly determine the value of its net assets; or (d)
the Securities and Exchange Commission, by order, so permits.
The Fund may amend the signature guarantee procedures set forth in the
Prospectus under "Redemption of Shares" if a viable signature guarantee program
is established.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
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For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signatures are persons not referenced in the account registration or if more
than 30 days have elapsed since the shareholder service agent established the
account on its records. Moreover, if the shareholder is a corporation,
partnership, trust, fiduciary, executor or administrator, the appropriate
documents appointing authorized signers (corporate resolutions, partnerships or
trust agreements) must accompany the authorization card. The documents must be
certified in original form, and the certificates must be dated within 60 days of
their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends each business day on Class A shares, Class B
shares and Class C shares and distributes monthly substantially all of its net
investment income to shareholders of Class A shares, Class B shares and Class C
shares. The daily dividends are a fixed amount determined for each class at
least monthly. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fees and higher transfer agency fees applicable to the Class B and
Class C shares. The total of the Class A, Class B and Class C dividends is
expected not to exceed the net income of the Fund for the month divided by the
number of business days in the month. Net investment income for dividend
purposes consists of interest earned less expenses of the Fund accrued for that
dividend period. Dividends and distributions are automatically reinvested in
shares of the Fund at the next determined net asset value without sales charge,
except that any shareholder may elect in writing to receive any such dividends
or distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash.
As described below under "Tax Treatment of Option and Futures
Transactions," 60% of any gain or loss realized by the Fund from transactions in
listed options, futures, and options on futures generally constitutes long-term
capital gains or losses and the balance constitutes short-term capital gains or
losses. The Fund may designate up to the entire amount of any net long-term
capital gains realized during the Fund's fiscal year as
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being paid in the last quarterly distribution of gains during such fiscal year
or in the first quarterly distribution of gains after the close of such fiscal
year.
Dividends and distributions declared to shareholders of record after
September 30 of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even though paid in
the next year.
TAX STATUS OF THE FUND
Through payment of all or substantially all of its taxable net investment
income and net realized capital gains to shareholders and by meeting certain
diversification of assets and other requirements of the Code, the Fund expects
to qualify as a regulated investment company under Sections 851-855 of the Code.
This enables the Fund to be relieved from payment of income taxes on that
portion of its taxable net investment income and net realized capital gains
distributed to shareholders.
If for any taxable year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income,
including any net realized capital gains, would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders).
Dividends paid by the Fund from its net investment income, and
distributions of the Fund's net realized short-term capital gains, are taxable
to shareholders as ordinary income. Any distributions designated as being made
from the Fund's net realized long-term capital gains are taxable to shareholders
as long-term capital gains, regardless of the length of the period that a
shareholder has held his shares. Not later than 60 days after the end of each
fiscal year, the Fund will send to its shareholders a written notice required by
the Code designating the amount of any distributions made during such year which
are long-term capital gains distributions. Such notice may be included in the
annual report to shareholders. A dividend or capital gains distribution received
after the purchase of the Fund's shares reduces the net asset value of the
shares by the amount of the dividend or distribution and will be subject to
income taxes. A loss on the sale of shares held for less than six months
attributable to a long-term capital gains distribution is treated as a long-term
capital loss for federal income tax purposes.
If for any fiscal year of the Fund, the amount of distributions paid or
deemed paid for such year exceeds its net investment income plus net realized
capital gains for such year, the amount of such excess is expected to be treated
as a return of capital to all those shareholders who held shares of the Fund
during the year. In such case, each distribution paid or deemed paid for that
year would be treated, in the same proportion, in part as a distribution of
taxable income and in part as a return of capital. Shareholders would incur no
current federal income tax on the portion of such distributions which are
treated as a return of capital, but each shareholder's basis in the Fund's
shares would be reduced by that amount. This reduction of basis would operate to
increase the shareholder's capital gain, or decrease its capital loss, upon
redemption of Fund shares.
One of the requirements for qualification as a regulated investment company
is that less than 30% of the Fund's gross income be derived from gains from the
sale or other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in the writing of options on securities
which have been held less than three months, in the writing of options which
expire in less than three months, in effecting closing purchase transactions
with respect to options which have been written less than three months prior to
such transactions and in effecting closing transactions in futures contracts
which have been open for less than three months. Another requirement for
qualification is that at least 90% of the Fund's gross income in each fiscal
year be derived from dividends, interest and gains from the sale or other
disposition of securities.
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable income for
the twelve-months ended December 31, plus 98% of its capital gain net income for
the twelve-months ended October 31 of such year. The Fund intends to distribute
sufficient amounts to avoid liability for the excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of
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<PAGE> 77
determining gain or loss. To the extent the sales charge is not allowed in
determining gain or loss on the initial shares, it is capitalized on the basis
of the subsequent shares.
Since none of the Fund's net investment income arises from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction for corporations.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS
The Code includes special rules applicable to listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other terminations of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, when held by the Fund at the end of a
fiscal year, generally are required to be treated as sold at market value on the
last day of such fiscal year for federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by the Fund from transactions
in over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Fund are exercised, the gain or loss realized on the
sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
A substantial portion of the Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle in which at
least one, but not all, of the positions are Section 1256 contracts is a "mixed
straddle" under the Code if certain identification requirements are met.
28
<PAGE> 78
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and, (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
PRIOR PERFORMANCE INFORMATION
The Fund's average annual total return, computed in the manner described in
the Prospectus, for Class A shares of the Fund for the one-year, five-year, and
eight-and-one-half year (period since initial public offering of Fund) periods
ended December 31, 1994 was -2.12%, 4.59% and 5.36%, respectively. The average
annual total return, computed in the manner described in the Prospectus, for
Class B shares of the Fund for the one-year, and three-years-and-one month (the
initial offering of Class B shares) period ended December 31, 1994 was -3.50%
and 1.40%, respectively. The average annual total return, computed in the manner
described in the Prospectus, for Class C shares of the Fund for the one-year,
and seventeen-=month (the initial offering of Class C shares) period ended
December 31, 1994, was -1.50% and 0.29%, respectively. These results are based
on historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objective and policies as well as the risks incurred in
the Fund's investment practices.
The annualized current yield, both subsidized and non-subsidized, for Class
A, Class B and Class C shares of the Fund for the 30 day period ending December
31, 1994 is listed below.
<TABLE>
<CAPTION>
NON-SUBSIDIZED
--------------
<S> <C>
Class A 4.75%
Class B 4.04%
Class C 4.04%
</TABLE>
The yield for Class A shares of the Fund is not fixed and will fluctuate in
response to prevailing interest rates and the market value of portfolio
securities, and as a function of the type of securities owned by the Fund,
portfolio maturity and the Fund's expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time VKAC will announce the results of their monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
Intentions and the Van Kampen American Capital Mutual Fund Index -- which polls
measure how Americans plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by American Capital in 1994.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of
29
<PAGE> 79
return. Such illustrations may be in the form of charts or graphs and will not
be based on historical returns experienced by the Funds.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, perform an annual audit of the
Fund's financial statements.
FINANCIAL STATEMENTS
Financial statements, including Investment Portfolio, Statement of Assets
and Liabilities, Statement of Operations, Statement of Changes in Net Assets,
Notes to Financial Statements, Financial Highlights and Report of Independent
Accountants on such financial statements, are hereby incorporated by reference
to the Fund's Annual Report to shareholders for the year ended December 31,
1994, previously filed with the SEC on or about March 10, 1995. The Fund will
furnish, without charge, a copy of such Annual Report on request by calling or
writing the Fund at 2800 Post Oak Boulevard, Houston, Texas 77056, (800)
421-5666.
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund.
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Net Asset Value per Class A Share $11.90
Class A Per Share Sales Charge -- 3.25% of offering price
(2.30% of net asset value per share) $ .27
------------
Class A Per Share Offering Price to the Public $12.17
</TABLE>
30
<PAGE> 80
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
<TABLE>
<CAPTION>
INCLUDED
IN
PART B
--------
<S> <C>
Investment Portfolio
December 31, 1994 *
Statement of Assets and Liabilities
December 31, 1994 *
Statement of Operations
Year Ended December 31, 1994 *
Statement of Changes in Net Assets
Year Ended December 31, 1993 *
Year Ended December 31, 1994 *
Notes to Financial Statements *
Financial Highlights *
Report of Independent Accountants *
</TABLE>
The Statement of Sources of Net Assets and Schedules II and III are omitted
because the required information is included in the financial statements filed
herewith, or because the conditions requiring their filing do not exist.
(b) Exhibits
<TABLE>
<C> <S>
1 -- Second Amended and Restated Agreement and Declaration of Trust dated
April 1, 1993 incorporated herein by reference. (Exhibit 1 to Form
N-1A of Registrant, Registration No. 33-1705, Post-Effective
Amendment No. 15, filed on May 2, 1994).
2 -- Bylaws as amended March 3, 1995.
3 -- Inapplicable.
4.1 -- Specimen Certificate incorporated herein by reference (Exhibit 4 to
Form N-1A of Registrant, Registration No. 33-1705, Pre-Effective
Amendment No. 2, filed on May 9, 1986).
4.2 -- Specimen Stock Certificate (Class B Shares) incorporated herein by
reference. (Exhibit 4.2 to Form N-1A of Registrant, Registration No.
33-1705, Post-Effective Amendment No. 15, filed on May 2, 1994).
4.3 -- Specimen Stock Certificate (Class C Shares) incorporated herein by
reference. (Exhibit 4.3 to Form N-1A of Registrant, Registration No.
33-1705, Post-Effective Amendment No. 15, filed on May 2, 1994).
5 -- Investment Advisory Agreement dated December 20, 1994.
6.1 -- Underwriting Agreement dated December 30, 1994.
6.2 -- Form of Selling Group Agreement incorporated herein by reference
(Exhibit 6.2 to Form N-1A of Registrant's Registration No. 33-1705,
Post-Effective Amendment No. 11, filed February 25, 1992).
6.3 -- Form of Selling Agreement for banks and bank affiliated
broker/dealers incorporated herein by reference (Exhibit 6.3 to Form
N-1A of Registrant's Registration No. 33-1705, Post-Effective
Amendment No. 11, filed February 25, 1992).
</TABLE>
C-1
<PAGE> 81
<TABLE>
<C> <S>
7 -- Inapplicable.
8.1 -- Custodian Contract dated December 2, 1993 incorporated herein by
reference (Exhibit 8 to Form N-1A of American Capital Global Managed
Assets Fund, Inc., Registration No. 33-74024, Post-Effective
Amendment No. 2, filed on May 6, 1994).
8.2 -- Transfer Agency and Service Agreement dated January 1, 1995
incorporated herein by reference (Exhibit 8.2 to Form N-1A of
American Capital Tax-Exempt Trust, Registration No. 2-96030,
Post-Effective Amendment No. 15, filed March 29, 1995).
9 -- Form of Data Access Services Agreement dated December 2, 1993
incorporated herein by reference (Exhibit 9.2 to Form N-1A of
American Capital Utilities Income Fund, Inc., Registration No.
33-68452, Post-Effective Amendment No. 1, filed on May 19, 1994).
10 -- Opinion of Counsel.
11 -- Consent of Independent Accountants.
12 -- Inapplicable.
13 -- Investment Letter incorporated herein by reference (Exhibit 13 to
Form N-1A of Registrant, Registration No. 33-1705, Pre-Effective
Amendment No. 2, filed on May 9, 1986).
14.1 -- Individual Retirement Account Brochure with Application incorporated
herein by reference (Exhibit 14.2 to Form N-1A of American Capital
Reserve Fund, Inc., Registration No. 2-50870, Post-Effective
Amendment No. 31, filed on September 24, 1993).
14.2 -- 403(b)(7) Custodial Account incorporated herein by reference (Exhibit
14.2 to Form N-1A of American Capital Reserve Fund, Inc.,
Registration No. 2-50870, Post-Effective Amendment No. 30, filed on
September 24, 1992).
14.3 -- ORP 403(b)(7) Custodial Account incorporated herein by reference
(Exhibit 14.3 to Form N-1A of American Capital Reserve Fund, Inc.,
Registration No. 2-50870, Post-Effective Amendment No. 30, filed on
September 24, 1992).
14.4 -- Retirement Plans for the Small Business -- Forms Package and Plan
Documents incorporated herein by reference (Exhibit 14.9 to Form N-1A
of American Capital Emerging Growth Fund, Inc., Registration No.
2-33214, Post-Effective Amendment No. 44, filed on December 21,
1990).
14.5 -- Prototype Profit Sharing/Money Purchase Plan and Trust incorporated
herein by reference (Exhibit 14.5 to Form N-1A of American Capital
Growth and Income Fund, Inc., Registration No. 2-21657,
Post-Effective Amendment No. 61, filed on March 26, 1991).
14.6 -- Prototype 401(k) Plan and Trust incorporated herein by reference
(Exhibit 14.6 to Form N-1A of American Capital Growth and Income
Fund, Inc., Registration No. 2-21657, Post-Effective Amendment No.
61, filed on March 26, 1991).
14.7 -- Salary Reduction Simplified Employee Pension Plan incorporated herein
by reference (Exhibit 14.7 to Form N-1A of American Capital World
Portfolio Series, Inc., Registration No. 33-37879, Post-Effective
Amendment No. 9, filed September 24, 1993).
15.1 -- Plan of Distribution for Class A shares dated December 15, 1988, as
amended October 7, 1994.
15.2 -- Plan of Distribution for Class B shares dated November 5, 1991, as
amended October 7, 1994.
</TABLE>
C-2
<PAGE> 82
<TABLE>
<C> <S>
15.3 -- Plan of Distribution for Class C shares dated May 10, 1993, as
amended October 7, 1994.
15.4 -- Form of Servicing Agreement incorporated herein by reference (Exhibit
15.3 to Form N-1A of Registrant's Registration No. 33-1705,
Post-Effective No. 11, filed February 25, 1992).
15.5 -- Form of Servicing Agreement for banks and bank affiliated
broker/dealers incorporated herein by reference (Exhibit 15.4 to Form
N-1A of Registrant's Registration No. 33-1705, Post-Effective No. 11,
filed February 25, 1992).
16 -- Computation Measure for Performance Information.
18 -- Multiple Class Plan dated January 25, 1995.
19.1 -- Powers-of-Attorney for J. Miles Branagan and William S. Woodside
incorporated herein by reference (Exhibit 17.1 to Form N-1A of
Registrant, Registration No. 33-1705, Post-Effective Amendment No. 8,
filed April 5, 1991).
19.2 -- Powers-of-Attorney for Roger Hilsman, Don G. Powell, David Rees and
Fernando Sisto incorporated herein by reference (Exhibit 17.3 to Form
N-1A of Registrant, Registration No. 33-1705, Post-Effective
Amendment No. 7, filed on April 25, 1990).
19.3 -- Powers-of-Attorney for Richard E. Caruso and Lawrence J. Sheehan
incorporated herein by reference (Exhibit 17.3 to Form N-1A of
Registrant's Registration No. 33-1705, Post-Effective No. 11, filed
February 25, 1992).
27 -- Financial Data Schedule.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
AS OF: MARCH 31, 1995
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
----------------------------------------------- ------------------------
<S> <C>
Shares of Beneficial Interest, $0.01 par value 3,243 (Class A)
913 (Class B)
310 (Class C)
</TABLE>
ITEM 27. INDEMNIFICATION.
Item 27 is incorporated herein by reference to Registrant's Original
Registration Statement filed on November 20, 1985.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
During the last two fiscal years, the investment adviser has not engaged in
any business of a substantial nature except as investment adviser to the
American Capital Funds Group (listed below) and to the Emerging Growth Portfolio
of the Smith Barney Series Fund, and as adviser to Common Sense Trust, Western
Reserve Life -- Emerging Growth Portfolio and Smith Barney/Travelers Series Fund
Inc. -- American Capital Enterprise Portfolio, all registered open-end
investment companies. The American Capital Funds Group and Common Sense Trust
are all located at 2800 Post Oak Blvd., Houston, Texas 77056. The Emerging
Growth Portfolio of the Smith Barney Series Fund and the American Capital
Enterprise Portfolio of the Smith Barney/Travelers Series Fund Inc. are located
at Two World Trade Center, New York, New York 10048. Western Reserve
Life -- Emerging Growth Portfolio is located at 201 Highland Avenue, Largo,
Florida 34640.
C-3
<PAGE> 83
The American Capital Funds Group of registered investment companies for
which Van Kampen American Capital Asset Management, Inc. (formerly American
Capital Asset Management, Inc.) currently serves as investment adviser are
listed below:
American Capital Bond Fund, Inc.
American Capital Comstock Fund, Inc.
American Capital Convertible Securities, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Exchange Fund
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Income Trust
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Small Capitalization Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
Mosher, Inc.
C-4
<PAGE> 84
During the last two fiscal years, no officer or director of the investment
adviser has engaged in any other business, profession, vocation or employment of
a substantial nature except as follows:
William N. Brown; Senior Vice President
Vice President and Director;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
Vice President;
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.
Huey P. Falgout, Jr.; Vice President and Assistant Secretary
Vice President and Assistant Corporate Secretary;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Massachusetts, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.
Advantage Capital Insurance Agency of Texas, Inc.
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
ACCESS Investor Services, Inc.
Van Kampen American Capital Trust Company
Nori L. Gabert; Vice President, Associate General Counsel and Secretary
Vice President, Corporate Secretary and Counsel;
American Capital Contractual Services, Inc.
Vice President and Corporate Secretary;
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Vice President and Assistant Corporate Secretary;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
C-5
<PAGE> 85
Wayne D. Godlin; Vice President -- Portfolio Manager
Vice President;
Van Kampen American Capital Advisors, Inc.
Ronald A. Nyberg; Senior Vice President and General Counsel
Executive Vice President, General Counsel and Corporate Secretary;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.
Executive Vice President, General Counsel and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Vice President, General Counsel and Assistant Corporate Secretary;
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Vice President and Assistant Corporate Secretary;
American Capital Contractual Services, Inc.
Vice President;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
General Counsel and Assistant Secretary;
McCarthy, Crisanti & Maffei, Inc.
McCarthy, Crisanti & Maffei Acquisition Corporation
Robert C. Peck, Jr.; Senior Vice President, Chief Investment
Officer -- Fixed-Income Department and Director
Senior Vice President, Chief Investment Officer -- Fixed-Income Department
and Director;
Van Kampen American Capital Advisors, Inc.
Don G. Powell; President, Chief Executive Officer and Director
President, Chief Executive Officer and Director;
Van Kampen American Capital, Inc.
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Holding, Inc.
VK/AC Holding, Inc.
Chairman, Chief Executive Officer and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Executive Vice President and Director;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.
C-6
<PAGE> 86
American Capital Shareholders Corporation
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
Director;
McCarthy, Crisanti & Maffei, Inc.
McCarthy, Crisanti & Maffei Acquisition Corporation
William R. Rybak; Senior Vice President, Chief Financial Officer and Treasurer
Executive Vice President, Chief Financial Officer and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Executive Vice President and Chief Financial Officer;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.
Vice President, Chief Financial Officer and Treasurer;
ACCESS Investor Services, Inc.
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
Vice President and Chief Financial Officer;
Advantage Capital Corporation
American Capital Contractual Services, Inc.
Vice President and Treasurer;
Advantage Capital Credit Services, Inc.
Treasurer;
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Massachusetts, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.
Alan T. Sachtleben; Senior Vice President, Chief Investment Officer -- Equity
Department and Director
Executive Vice President;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.
Senior Vice President, Chief Investment Officer -- Equity Department and
Director;
Van Kampen American Capital Advisors, Inc.
J. David Wise; Vice President, Associate General Counsel, Compliance Review
Officer and Assistant Secretary
Vice President, General Counsel and Corporate Secretary;
Van Kampen American Capital Trust Company
Vice President and Assistant Corporate Secretary;
Van Kampen American Capital Services, Inc.
C-7
<PAGE> 87
Vice President;
ACCESS Investor Services, Inc.
Paul R. Wolkenberg; Senior Vice President
President, Chief Operating Officer and Director;
Van Kampen American Capital Services, Inc.
Executive Vice President, Chief Operating Officer and Director;
Van Kampen American Capital Trust Company
Executive Vice President and Director;
ACCESS Investor Services, Inc.
Executive Vice President;
American Capital Shareholders Corporation
Director;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.
Lea S. Zeitman; Assistant Secretary
Senior Vice President, Chief Administrative Officer, General Counsel and
Corporate Secretary;
Advantage Capital Corporation
Vice President, General Counsel and Corporate Secretary;
Advantage Capital Credit Services, Inc.
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.
Vice President and Assistant Corporate Secretary;
Van Kampen American Capital T.A., Inc.
Vice President;
American Capital Contractual Services, Inc.
Van Kampen American Capital Trust Company
Assistant Corporate Secretary;
Van Kampen American Capital Advisors, Inc.
Clerk;
Advantage Capital Insurance Agency of Massachusetts, Inc.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Van Kampen American Capital Distributors, Inc. acts as principal
underwriter for the following registered investment companies:
American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
C-8
<PAGE> 88
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
*Van Kampen Merritt California Tax Free Income Fund
Van Kampen Merritt Equity Trust
*Van Kampen Merritt Michigan Tax Free Income Fund
*Van Kampen Merritt Missouri Tax Free Income Fund
Van Kampen Merritt Money Market Trust
*Van Kampen Merritt Ohio Tax Free Income Fund
Van Kampen Merritt Pennsylvania Tax Free Income Fund
Van Kampen Merritt Prime Rate Income Trust
Van Kampen Merritt Series Trust
Van Kampen Merritt Tax Free Fund
Van Kampen Merritt Tax Free Money Fund
Van Kampen Merritt Trust
Van Kampen Merritt U.S. Government Trust
Van Kampen Merritt Insured Tax Free Income Fund
Van Kampen Merritt Tax Free High Income Fund
Van Kampen Merritt California Insured Tax Free Fund
Van Kampen Merritt Municipal Income Fund
Van Kampen Merritt Limited Term Municipal Income Fund
Van Kampen Merritt Florida Insured Tax Free Income Fund
Van Kampen Merritt New Jersey Tax Free Income Fund
Van Kampen Merritt New York Tax Free Income Fund
Van Kampen Merritt High Yield Fund
Van Kampen Merritt Short-Term Global Income Fund
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Van Kampen Merritt Strategic Income Fund
Van Kampen Merritt Emerging Markets Income Fund
Van Kampen Merritt Growth Fund
Van Kampen Merritt Growth and Income Fund
Van Kampen Merritt Utility Fund
Van Kampen Merritt Balanced Fund
Van Kampen Merritt Total Return Fund
Van Kampen Merritt Pennsylvania Tax Free Income Fund
Van Kampen Merritt Money Market Fund
Van Kampen Merritt Tax Free Money Fund
Van Kampen Merritt Prime Rate Income Trust
<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust Series 1
Insured Municipals Income Trust Series 1 through 342
Insured Municipals Income Trust (Discount) Series 5 through 13
</TABLE>
C-9
<PAGE> 89
<TABLE>
<S> <C>
Insured Municipals Income Trust (Short Intermediate Term) Series 1 through 96
Insured Municipals Income Trust (Intermediate Term) Series 5 through 81
Insured Municipals Income Trust (Limited Term) Series 9 through 78
Insured Municipals Income Trust (Premium Bond Series) Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 and 2
Insured Tax Free Bond Trust Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) Series 1
Investors' Quality Tax-Exempt Trust Series 1 through 88
Investors' Quality Tax-Exempt Trust-Intermediate Series 1
Investors' Corporate Income Trust Series 1 through 12
Investors' Governmental Securities Income Trust Series 1 through 7
Van Kampen Merritt International Bond Income Trust Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust Series 1
Alabama Insured Municipals Income Trust Series 1 through 8
Arizona Investors' Quality Tax-Exempt Trust Series 1 through 16
Arizona Insured Municipals Income Trust Series 1 through 12
Arkansas Insured Municipals Income Trust Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust Series 1
California Insured Municipals Income Trust Series 1 through 136
California Insured Municipals Income Trust (Premium Bond Series) Series 1
California Insured Municipals Income Trust (1st Intermediate
Series) Series 1 through 3
California Investors' Quality Tax-Exempt Trust Series 1 through 20
California Insured Municipals Income Trust (Intermediate
Laddered) Series 1 through 16
Colorado Insured Municipals Income Trust Series 1 through 73
Colorado Investors' Quality Tax-Exempt Trust Series 1 through 18
Connecticut Insured Municipals Income Trust Series 1 through 26
Connecticut Investors' Quality Tax-Exempt Trust Series 1
Delaware Investor's Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipal Income Trust -- Intermediate Series 1 and 2
Florida Insured Municipals Income Trust Series 1 through 88
Florida Investors' Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate Laddered) Series 1 through 14
Georgia Insured Municipals Income Trust Series 1 through 73
Georgia Investors' Quality Tax-Exempt Trust Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust Series 1
Investors' Quality Municipals Trust (AMT) Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust Series 1 through 53
Louisiana Insured Municipals Income Trust Series 1 through 13
Maine Investor's Quality Tax-Exempt Trust Series 1
Maryland Investors' Quality Tax-Exempt Trust Series 1 through 69
Massachusetts Insured Municipals Income Trust Series 1 through 30
Massachusetts Insured Municipals Income Trust
(Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust Series 1 through 124
Michigan Insured Municipals Income Trust (Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust (1st Intermediate
Series) Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust Series 1 through 30
Minnesota Insured Municipals Income Trust Series 1 through 54
Minnesota Investors' Quality Tax-Exempt Trust Series 1 through 21
Missouri Insured Municipals Income Trust Series 1 through 88
Missouri Insured Municipals Income Trust (Premium Bond Series) Series 1
Missouri Investors' Quality Tax-Exempt Trust Series 1 through 15
</TABLE>
C-10
<PAGE> 90
<TABLE>
<S> <C>
Missouri Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1
Nebraska Investors' Quality Tax-Exempt Trust Series 1 through 9
New Mexico Insured Municipals Income Trust Series 1 through 16
New Jersey Insured Municipals Income Trust Series 1 through 98
New Jersey Investors' Quality Tax-Exempt Trust Series 1 through 22
New Jersey Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 and 4
New York Insured Municipals Income Trust -- Intermediate Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) Series 1
New York Insured Municipals Income Trust Series 1 through 123
New York Insured Tax-Free Bond Trust Series 1
New York Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 through 14
New York Investors' Quality Tax-Exempt Trust Series 1
North Carolina Investors' Quality Tax-Exempt Trust Series 1 through 80
Ohio Insured Municipals Income Trust Series 1 through 94
Ohio Insured Municipals Income Trust (Premium Bond Series) Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) Series 1
Ohio Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust Series 1 through 16
Oklahoma Insured Municipal Income Trust Series 1 through 14
Oregon Investors' Quality Tax-Exempt Trust Series 1 through 53
Pennsylvania Insured Municipals Income Trust -- Intermediate Series 1 through 6
Pennsylvania Insured Municipals Income Trust Series 1 through 196
Pennsylvania Insured Municipals Income Trust (Premium Bond
Series) Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust Series 1 through 78
Tennessee Insured Municipals Income Trust Series 1-3 and 5-30
Texas Insured Municipals Income Trust Series 1 through 39
Texas Insured Municipals Income Trust (Intermediate Ladder) Series 1
Virginia Investors' Quality Tax-Exempt Trust Series 1 through 63
Van Kampen Merritt Utility Income Trust Series 1 through 6
Van Kampen Merritt Insured Income Trust Series 1 through 36
Van Kampen Merritt Insured Income Trust (Intermediate Term) Series 1 through 33
Van Kampen Merritt Select Equity Trust Series 1
Van Kampen Merritt Select Equity and Treasury Trust Series 1
Washington Insured Municipals Income Trust Series 1
West Virginia Insured Municipals Income Trust Series 1 through 5
</TABLE>
- - ---------------
*Has not yet commenced investment operations.
Van Kampen American Capital Distributors, Inc. also acts as principal
underwriter or depositor for American Capital Monthly Accumulation Plans, a
registered unit investment trust.
C-11
<PAGE> 91
(b) The following information is furnished with respect to each officer and
director of Van Kampen American Capital Distributors, Inc.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS PRINCIPAL UNDERWRITER WITH REGISTRANT
- - --------------------------- ------------------------------- ----------------------
<S> <C> <C>
Don G. Powell(1) Chairman and Chief Executive President and Director
Officer
William R. Molinari(2) President and Chief Operating --
Officer
Ronald A. Nyberg(2) Executive Vice President and --
General Counsel
William R. Rybak(2) Executive Vice President and --
Chief Financial Officer
Robert A. Broman(2) Sr. Vice President --
Gary R. DeMoss(2) Sr. Vice President --
Robert J. Froehlich(2) Sr. Vice President --
Keith K. Furlong(2) Sr. Vice President --
Robert S. West(2) Sr. Vice President --
John H. Zimmermann, III(2) Sr. Vice President --
Timothy K. Brown(2) 1st Vice President --
James S. Fosdick(2) 1st Vice President --
Edward F. Lynch(2) 1st Vice President --
Scott E. Martin(2) 1st Vice President, Deputy --
General Counsel and Secretary
Mark R. McClure(2) 1st Vice President --
Mark T. McGannon(2) 1st Vice President --
Charles G. Millington(2) 1st Vice President, Controller --
and Treasurer
Michael L. Stallard(2) 1st Vice President --
David M. Swanson(2) 1st Vice President --
Patricia A. Bettlach(2) Vice President --
Carol S. Biegel(2) Vice President --
Linda Mae Brown(2) Vice President --
William F. Burke, Jr.(2) Vice President --
Thomas M. Byron(2) Vice President --
Glenn M. Cackovic(2) Vice President --
Joseph N. Caggiano(2) Vice President --
Richard J. Charlino(2) Vice President --
Eleanor M. Cloud(2) Vice President --
Dominick Cogliandro(2) Vice President and Assistant --
Treasurer
David B. Dibo(2) Vice President --
Howard A. Doss(2) Vice President --
Charles Edward Fisher(2) Vice President --
William J. Fow(2) Vice President --
Erich P. Gerth(2) Vice President --
John A. Hanhauser(2) Vice President --
Eric J. Hargens(2) Vice President --
J. Christopher Jackson(2) Vice President, Associate --
General Counsel and Assistant
Secretary
Dana R. Klein(2) Vice President --
Ann Marie Klingenhagen(2) Vice President --
</TABLE>
C-12
<PAGE> 92
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS PRINCIPAL UNDERWRITER WITH REGISTRANT
- - --------------------------- ------------------------------- ----------------------
<S> <C> <C>
David R. Kowalski(2) Vice President and Director of --
Compliance
S. William Lehew III(2) Vice President --
Walter Lynn(2) Vice President --
Deborah A. Lysacek(2) Vice President --
Michele L. Manley(2) Vice President --
Kevin S. Marsh(2) Vice President --
Ruth L. McKeel(2) Vice President --
Ronald E. Pratt(2) Vice President --
Craig S. Prichard(2) Vice President --
Michael W. Rohr(2) Vice President --
James B. Ross(2) Vice President --
James J. Ryan(2) Vice President --
Heather R. Sabo(2) Vice President --
Lisa A. Schomer(2) Vice President --
Ronald J. Schuster(2) Vice President --
Diane H. Snowden(2) Vice President --
Darren D. Stabler(2) Vice President --
Christopher J. Vice President --
Staniforth(2)
William C. Strafford(2) Vice President --
James C. Taylor(2) Vice President --
John F. Tierney(2) Vice President --
Curtis L. Ulvestad(2) Vice President --
Jeffrey A. Urbina(2) Vice President --
Sandra A. Waterworth(2) Vice President and Assistant --
Secretary
Steven T. West(2) Vice President --
Weston B. Wetherell(2) Vice President, Associate --
General Counsel and Assistant
Secretary
James R. Yount(2) Vice President --
Richard P. Zgonina(2) Vice President --
</TABLE>
- - ---------------
(1) 2800 Post Oak Blvd., Houston, Texas 77056
(2) One Parkview Plaza, Oakbrook Terrace, IL 60181
(c) Commissions and other compensation received by each principal
underwriter who is not an affiliated person of the Registrant or an affiliated
person of such an affiliated person, directly or indirectly, from the Registrant
during the Registrant's last fiscal year:
Inapplicable.
C-13
<PAGE> 93
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Unless otherwise stated below, the books or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are in the physical possession of:
Fund Treasurer
Mutual Fund Accounting
2800 Post Oak Boulevard
Houston, Texas 77056
<TABLE>
<CAPTION>
RULE LOCATION OF REQUIRED RECORDS
- - ------ ------------------------------------------------------------------
<S> <C> <C>
31a-1 (b)(2)(iii) Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
(b)(2)(iv) ACCESS Investor Services, Inc.
7501 Tiffany Springs Parkway
Kansas City, Missouri 64153
(b)(4)-(6) Van Kampen American Capital Asset Management, Inc.
(b)(9)-(11) Van Kampen American Capital Asset Management, Inc.
</TABLE>
ITEM 31. MANAGEMENT SERVICES.
There are no management related services contracts not discussed in Part A
or Part B.
ITEM 32. UNDERTAKINGS.
Registrant hereby undertakes, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
director or directors and to assist in communications with other shareholders as
required by Section 16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-14
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Houston, and State of Texas
on the day of April, 1995.
AMERICAN CAPITAL
FEDERAL MORTGAGE TRUST
/s/ DON G. POWELL
Don G. Powell, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on April , 1995:
Principal Executive Officer and Trustee:
<TABLE>
<C> <S>
/s/ DON G. POWELL President and Trustee
(Don G. Powell)
Principal Financial Officer and
Accounting Officer:
/s/ CURTIS W. MORELL Vice President and Treasurer
(Curtis W. Morell)
Trustees:
*J. MILES BRANAGAN Trustee
(J. Miles Branagan)
*RICHARD E. CARUSO Trustee
(Richard E. Caruso)
*ROGER HILSMAN Trustee
(Roger Hilsman)
*DAVID REES Trustee
(David Rees)
*LAWRENCE J. SHEEHAN Trustee
(Lawrence J. Sheehan)
*FERNANDO SISTO Trustee
(Fernando Sisto)
*WILLIAM S. WOODSIDE Trustee
(William S. Woodside)
</TABLE>
- - ---------------
* Signed by the undersigned pursuant to a Power-of-Attorney previously filed
with the Commission.
/s/ NORI L. GABERT
Nori L. Gabert
Attorney-in-Fact
<PAGE> 95
INDEX TO EXHIBITS TO FORM N-1A
REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- - ---------------- --------------------------------------------------------------------------
<C> <S>
99.2 -- Bylaws as amended March 3, 1995
99.5 -- Investment Advisory Agreement dated December 20, 1994.
99.6.1 -- Underwriting Agreement dated December 20, 1994.
99.10 -- Opinion of Counsel.
99.11 -- Consent of Independent Accountants.
99.15.1 -- Plan of Distribution for Class A shares dated December 15, 1988, as
amended October 7, 1994.
99.15.2 -- Plan of Distribution for Class B shares dated November 5, 1991, as
amended October 7, 1994.
99.15.3 -- Plan of Distribution for Class C shares dated May 10, 1993, as
amended October 7, 1994.
99.16 -- Computation Measure for Performance Information.
99.18 -- Multiple Class Plan dated January 25, 1995.
27 -- Financial Data Schedules.
</TABLE>
<PAGE> 1
EXHIBIT 2
_______________________________________
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
By-Laws
(As amended March 3, 1995)
_______________________________________
<PAGE> 2
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
By-Laws
(As amended March 3, 1995)
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
RECITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I - SHAREHOLDERS AND SHAREHOLDERS'
MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Presiding Officer; Secretary . . . . . . . . . . . . . . . . . . 1
Section 1.3 Authority of Chairman of Meeting
to Interpret Declaration and
By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.4 Voting; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.5 Inspectors . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6 Shareholders' Action in Writing . . . . . . . . . . . . . . . . 2
ARTICLE II - TRUSTEES AND TRUSTEES' MEETINGS . . . . . . . . . . . . . . . . . . . . 2
Section 2.1 Number of Trustees . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.2 Regular Meetings of Trustees . . . . . . . . . . . . . . . . . . 3
Section 2.3 Special Meetings of Trustees . . . . . . . . . . . . . . . . . . 3
Section 2.4 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.5 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.6 Participation by Telephone . . . . . . . . . . . . . . . . . . . 3
Section 2.7 Location of Meetings . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.8 Votes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.9 Rulings of Chairman . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.10 Trustees' Action in Writing . . . . . . . . . . . . . . . . . . . 4
Section 2.11 Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . 4
</TABLE>
<PAGE> 3
- ii -
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Section 2.12 Tenure of Trustees . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.1 Officers of the Trust . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.2 Time and Terms of Election . . . . . . . . . . . . . . . . . . . 5
Section 3.3 Resignation and Removal . . . . . . . . . . . . . . . . . . . . . 5
Section 3.4 Fidelity Bond . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.5 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.6 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.7 Treasurer and Assistant Treasurers . . . . . . . . . . . . . . . 6
Section 3.8 Controller and Assistant Controllers . . . . . . . . . . . . . . 6
Section 3.9 Secretary and Assistant Secretaries . . . . . . . . . . . . . . 6
Section 3.10 Substitutions . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.11 Execution of Deeds, etc. . . . . . . . . . . . . . . . . . . . . 7
Section 3.12 Power to Vote Securities . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV - COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.1 Power of Trustees to Designate
Committees . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.2 Rules for Conduct of Committee Affairs . . . . . . . . . . . . . 8
Section 4.3 Trustees May Alter, Abolish, etc.,
Committees . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.4 Minutes; Review by Trustees . . . . . . . . . . . . . . . . . . . 8
ARTICLE V - SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE VI - SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.1 Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.2 Uncertificated Shares . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE> 4
- iii -
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Section 6.3 Share Certificates . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.4 Lost, Stolen, etc., Certificates. . . . . . . . . . . . . . . . . 9
Section 6.5 Record Transfer of Pledged Shares . . . . . . . . . . . . . . . . 10
ARTICLE VII - CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VIII - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8.1 By-Laws Subject to Amendment . . . . . . . . . . . . . . . . . . 10
Section 8.2 Notice of Proposal to Amend
By-Laws Required . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 5
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
BY-LAWS
These Articles are the By-Laws of AMERICAN CAPITAL FEDERAL MORTGAGE TRUST,
a trust with transferable shares established under the laws of The Commonwealth
of Massachusetts (the "Trust"), pursuant to an Agreement and Declaration of
Trust of the Trust (the "Declaration") made the 9th day of September, 1985, and
filed in the office of the Secretary of the Commonwealth. These By-Laws have
been adopted by the Trustees pursuant to the authority granted by Section 3.1
of the Declaration.
All words and terms capitalized in these By-Laws, unless otherwise defined
herein, shall have the same meanings as they have in the Declaration.
ARTICLE I
SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
SECTION 1.1. Meetings. A meeting of the Shareholders of the Trust shall
be held whenever called by the Trustees and whenever election of a Trustee or
Trustees by Shareholders is required by the provisions of the 1940 Act.
Meetings of Shareholders shall also be called by the Trustees when requested in
writing by Shareholders holding at least ten percent (10%) of the Shares then
outstanding for the purpose of voting upon removal of any Trustee, or if the
Trustees shall fail to call or give notice of any such meeting of Shareholders
for a period of thirty (30) days after such application, then Shareholders
holding at least ten percent (10%) of the Shares then outstanding may call and
give notice of such meeting. Notice of Shareholders' meetings shall be given as
provided in the Declaration.
SECTION 1.2. Presiding Officer; Secretary. The President shall preside
at each Shareholders' meeting as chairman of the meeting, or in the absence of
the President, the Trustees present at the meeting shall elect one of their
number as chairman of the meeting. Unless otherwise provided for by the
Trustees, the Secretary of the Trust shall be the secretary of all meetings of
Shareholders and shall record the minutes thereof.
SECTION 1.3. Authority of Chairman of Meeting to Interpret Declaration
and By-Laws. At any Shareholders' meeting the chairman of the meeting shall
be empowered to determine the construction or interpretation of the
Declaration or these By-Laws, or any part thereof or hereof, and his ruling
shall be final.
<PAGE> 6
2
SECTION 1.4. Voting; Quorum. At each meeting of Shareholders, except
as otherwise provided by the Declaration, every holder of record of Shares
entitled to vote shall be entitled to a number of votes equal to the number of
Shares standing in his name on the Share register of the Trust on the record
date of the meeting, which are outstanding at the time such vote is taken.
Shareholders may vote by proxy and the form of any such proxy may be prescribed
from time to time by the Trustees. A quorum shall exist if the holders of a
majority of the outstanding Shares of the Trust entitled to vote without regard
to Series, are present in person or by proxy, but any lesser number shall be
sufficient for adjournments. At all meetings of the Shareholders, votes shall
be taken by ballot for all matters which may be binding upon the Trustees
pursuant to Section 7.1 of the Declaration. On other matters, votes of
Shareholders need not be taken by ballot unless otherwise provided for by the
Declaration or by vote of the Trustees, or as required by the Act or the
Regulations, but the chairman of the meeting may in his discretion authorize
any matter to be voted upon by ballot.
SECTION 1.5. Inspectors. At any meeting of Shareholders, the chairman
of the meeting may appoint one or more Inspectors of Election or Balloting to
supervise the voting at such meeting or any adjournment thereof. If Inspectors
are not so appointed, the chairman of the meeting may, and on the request of
any Shareholder present or represented and entitled to vote shall, appoint one
or more Inspectors for such purpose. Each Inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of Inspector of Election or Balloting, as the case may be, at such
meeting with strict impartiality and according to the best of his ability. If
appointed, Inspectors shall take charge of the polls and, when the vote is
completed, shall make a certificate of the result of the vote taken and of such
other facts as may be required by law.
SECTION 1.6. Shareholders' Action in Writing. Nothing in this Article
I shall limit the power of the Shareholders to take any action by means of
written instruments without a meeting, as permitted by Section 7.6 of the
Declaration.
ARTICLE II
TRUSTEES AND TRUSTEES' MEETINGS
SECTION 2.1. Number of Trustees. There shall initially be one (1)
Trustee, and the number of Trustees shall thereafter be such number, authorized
by the Declaration, as from time to time shall be fixed by a vote adopted by a
Majority of the Trustees.
<PAGE> 7
3
SECTION 2.2. Regular Meetings of Trustees. Regular meetings of the
Trustees may be held without call or notice at such places and at such times as
the Trustees may from time to time determine; provided, that notice of such
determination, and of the time, place and purposes of the first regular meeting
thereafter, shall be given to each absent Trustee in accordance with Section
2.4 hereof.
SECTION 2.3. Special Meetings of Trustees. Special meetings of the
Trustees may be held at any time and at any place when called by the President
or the Treasurer or by two (2) or more Trustees, or if there shall be less than
three (3) Trustees, by any Trustee; provided, that notice of the time, place
and purposes thereof is given to each Trustee in accordance with Section 2.4
hereof by the Secretary or an Assistant Secretary or by the officer or the
Trustees calling the meeting.
SECTION 2.4. Notice of Meetings. Notice of any regular or special
meeting of the Trustees shall be sufficient if given in writing to each
Trustee, and if sent by mail at least five (5) days, or by telegram at least
twenty-four (24) hours, before the meeting, addressed to his usual or last
known business or residence address, or if delivered to him in person at least
twenty-four (24) hours before the meeting. Notice of a special meeting need
not be given to any Trustee who was present at an earlier meeting, not more
than thirty-one (31) days prior to the subsequent meeting, at which the
subsequent meeting was called. Notice of a meeting may be waived by any
Trustee by written waiver of notice, executed by him before or after the
meeting, and such waiver shall be filed with the records of the meeting.
Attendance by a Trustee at a meeting shall constitute a waiver of notice,
except where a Trustee attends a meeting for the purpose of protesting prior
thereto or at its commencement the lack of notice.
SECTION 2.5. Quorum; Presiding Officer. At any meeting of the
Trustees, a Majority of the Trustees shall constitute a quorum. Any meeting
may be adjourned from time to time by a majority of the votes cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice. Unless the Trustees shall otherwise elect,
generally or in a particular case, the President shall preside at each meeting
of the Trustees as chairman of the meeting or in the absence of the President,
the Trustees present at the meeting shall elect one of their number as Chairman
of the meeting.
SECTION 2.6. Participation by Telephone. One or more of the Trustees
may participate in a meeting thereof or of any Committee of the Trustees by
means of a conference telephone or similar communications equipment allowing
all persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.
<PAGE> 8
4
SECTION 2.7. Location of Meetings. Trustees' meetings may be held at
any place, within or without Massachusetts.
SECTION 2.8. Votes. Voting at Trustees' meetings may be conducted
orally, by show of hands, or, if requested by any Trustee, by written ballot.
The results of all voting shall be recorded by the Secretary in the minute
book.
SECTION 2.9. Rulings of Chairman. All other rules of conduct adopted
and used at any Trustees' meeting shall be determined by the chairman of such
meeting, whose ruling on all procedural matters shall be final.
SECTION 2.10. Trustees' Action in Writing. Nothing in this Article II
shall limit the power of the Trustees to take action by means of a written
instrument without a meeting, as provided in Section 4.2 of the Declaration.
SECTION 2.11. Resignations. Any Trustee may resign at any time by
written instrument signed by him and delivered to the Chairman, the President
or the Secretary or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
SECTION 2.12. Tenure of Trustees. Notwithstanding any other provision
herein to the contrary, through June 30, 1996, the term of office of each
trustee shall end at the time such trustee reaches the age of 76 1/2 or 74 1/2
for persons first elected on or after January 1, 1986 as a trustee or director
of any open end investment company managed by Van Kampen American Capital Asset
Management, Inc. and on and after July 1, 1996 the term of office of each
trustee shall end at the time such trustee reaches the age of 76 1/2 or 72 1/2
for persons first elected on or after January 1, 1986 as a trustee or director
of any open end investment company managed by Van Kampen American Capital Asset
Management, Inc.
ARTICLE III
OFFICERS
SECTION 3.1. Officers of the Trust. The officers of the Trust shall
consist of a President, a Treasurer and a Secretary, and may include one or
more Vice Presidents, Assistant Treasurers and Assistant Secretaries, and such
other officers as the Trustees may designate. Any person may hold more than
one office. No officer other than the President need be a Trustee.
<PAGE> 9
5
SECTION 3.2. Time and Terms of Election. The President, the Treasurer
and the Secretary shall be elected by the Trustees at their first meeting and
thereafter at the annual meeting of the Trustees, as provided in Section 4.2
of the Declaration. Such officers shall hold office until the next annual
meeting of the Trustees and until their successors shall have been duly
elected and qualified, and may be removed at any meeting by the affirmative
vote of a Majority of the Trustees. All other officers of the Trust may be
elected or appointed at any meeting of the Trustees. Such officers shall hold
office for any term, or indefinitely, as determined by the Trustees, and shall
be subject to removal, with or without cause, at any time by the Trustees.
SECTION 3.3. Resignation and Removal. Any officer may resign at any time
by giving written notice to the Trustees. Such resignation shall take effect
at the time specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. If
the office of any officer or agent becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or otherwise,
the Trustees may choose a successor, who shall hold office for the unexpired
term in respect of which such vacancy occurred. Except to the extent expressly
provided in a written agreement with the Trust, no officer resigning or removed
shall have any right to any compensation for any period following such
resignation or removal, or any right to damage on account of such removal.
SECTION 3.4. Fidelity Bond. The Trustees may, in their discretion,
direct any officer appointed by them to furnish at the expense of the Trust a
fidelity bond approved by the Trustees, in such amount as the Trustees may
prescribe.
SECTION 3.5. President. The President shall be the chief executive
officer of the Trust and, subject to the supervision of the Trustees, shall
have general charge and supervision of the business, property and affairs of
the Trust and such other powers and duties as the Trustees may prescribe.
SECTION 3.6. Vice Presidents. In the absence or disability of the
President, the Vice President or, if there shall be more than one, the Vice
Presidents in the order of their seniority or as otherwise designated by the
Trustees, shall exercise all of the powers and duties of the President. The
Vice Presidents shall have the power to execute bonds, notes, mortgages and
other contracts, agreements and instruments in the name of the Trust, and shall
do and perform such other duties as the Trustees or the President shall direct.
<PAGE> 10
6
SECTION 3.7. Treasurer and Assistant Treasurers. The Treasurer shall be
the chief financial officer of the Trust, and shall have the custody of the
Trust's funds and Securities, and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit
all moneys, and other valuable effects in the name and to the credit of the
Trust, in such depositories as may be designated by the Trustees, taking proper
vouchers for such disbursements, shall have such other duties and powers as may
be prescribed from time to time by the Trustees, and shall render to the
Trustees, whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Trust. If no Controller is
elected, the Treasurer shall also have the duties and powers of the Controller,
as provided in these By-Laws. Any Assistant Treasurer shall have such duties
and powers as shall be prescribed from time to time by the Trustees or the
Treasurer, and shall be responsible to and shall report to the Treasurer. In
the absence or disability of the Treasurer, the Assistant Treasurer or, if
there shall be more than one, the Assistant Treasurers in the order of their
seniority or as otherwise designated by the Trustees or the Chairman, shall
have the powers and duties of the Treasurer.
SECTION 3.8. Controller and Assistant Controllers. If a Controller is
elected, he shall be the chief accounting officer of the Trust and shall be in
charge of its books of account and accounting records and of its accounting
procedures, and shall have such duties and powers as are commonly incident to
the office of a controller, and such other duties and powers as may be
prescribed from time to time by the Trustees. The Controller shall be
responsible to and shall report to the Trustees, but in the ordinary conduct of
the Trust's business, shall be under the supervision of the Treasurer. Any
Assistant Controller shall have such duties and powers as shall be prescribed
from time to time by the Trustees or the Controller, and shall be responsible
to and shall report to the Controller. In the absence or disability of the
Controller, the Assistant Controller or, if there shall be more than one, the
Assistant Controllers in the order of their seniority or as otherwise
designated by the Trustees, shall have powers and duties or the Controller.
SECTION 3.9. Secretary and Assistant Secretaries. The Secretary shall,
if and to the extent requested by the Trustees, attend all meetings of the
Trustees, any Committee of the Trustees and/or the Shareholders and record all
votes and the minutes of proceedings in a book to be kept for that purpose,
shall give or cause to be given notice of all meetings of the Trustees, any
Committee of the Trustees, and of the Shareholders and shall perform such other
duties as may be prescribed by the Trustees. The Secretary, or in his absence
any Assistant Secretary, shall affix the Trust's seal to any instrument
requiring it, and when so
<PAGE> 11
7
affixed, it shall be attested by the signature of the Secretary or an Assistant
Secretary. The Secretary shall be the custodian of the Share records and all
other books, records and papers of the Trust (other than financial) and shall
see that all books, reports, statements, certificates and other documents and
records required by law are properly kept and filed. In the absence or
disability of the Secretary, the Assistant Secretary or, if there shall be more
than one, the Assistant Secretaries in the order of their seniority or as
otherwise designated by the Trustees, shall have the powers and duties of the
Secretary.
SECTION 3.10. Substitutions. In case of the absence or disability of any
officer of the Trust, or for any other reason that the Trustees may deem
sufficient, the Trustees may delegate, for the time being, the powers or
duties, or any of them, of such officer to any other officer, or to any
Trustee.
SECTION 3.11. Execution of Deeds, etc. Except as the Trustees may
generally or in particular cases otherwise authorize or direct, all deeds,
leases, transfers, contracts, proposals, bonds, notes, checks, drafts and other
obligations made, accepted or endorsed by the Trust shall be signed or endorsed
on behalf of the Trust by the Chairman, the President, one of the Vice
Presidents or the Treasurer.
SECTION 3.12. Power to Vote Securities. Unless otherwise ordered by the
Trustees, the Treasurer shall have full power and authority on behalf of the
Trust to give proxies for, and/or to attend and to act and to vote at, any
meeting of stockholders of any corporation in which the Trust may hold stock,
and at any such meeting the Treasurer or his proxy shall possess and may
exercise any and all rights and powers incident to the ownership of such stock
which, as the owner thereof, the Trust might have possessed and exercised if
present. The Trustees, by resolution from time to time, or, in the absence
thereof, the Treasurer, may confer like powers upon any other person or persons
as attorneys and proxies of the Trust.
ARTICLE IV
COMMITTEES
SECTION 4.1. Power of Trustees to Designate Committees. The Trustees, by
vote of a Majority of the Trustees, may elect from their number an Executive
Committee and any other Committees and may delegate thereto some or all of
their powers except those which by law, by the Declaration or by these By-Laws
may not be delegated; provided, that the Executive Committee shall not be
<PAGE> 12
8
empowered to elect the President, the Treasurer or the Secretary, to amend the
By-Laws, to exercise the powers of the Trustees under this Section 4.1 or under
Section 4.3 hereof, or to perform any act for which the action of a Majority of
the Trustees is required by law, by the Declaration or by these By-Laws. The
members of any such Committee shall serve at the pleasure of the Trustees.
SECTION 4.2. Rules for Conduct of Committee Affairs. Except as otherwise
provided by the Trustees, each Committee elected or appointed pursuant to this
Article IV may adopt such standing rules and regulations for the conduct of its
affairs as it may deem desirable, subject to review and approval of such rules
and regulations by the Trustees at the next succeeding meeting of the Trustees,
but in the absence of any such action or any contrary provisions by the
Trustees, the business of each Committee shall be conducted, so far as
practicable, in the same manner as provided herein and in the Declaration for
the Trustees.
SECTION 4.3. Trustees May Alter, Abolish, etc., Committees. The Trustees
may at any time alter or abolish any Committee, change the membership of any
Committee, or revoke, rescind or modify any action of any Committee or the
authority of any Committee with respect to any matter or class of matters;
provided, that no such action shall impair the rights of any third parties.
SECTION 4.4. Minutes; Review by Trustees. Any Committee to which the
Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Trustees.
ARTICLE V
SEAL
The seal of the Trust shall consist of a flat-faced circular die with the
word "Massachusetts", together with the name of the Trust, the words "Trust
Seal", and the year of its organization cut or engraved thereon, but, unless
otherwise required by the Trustees, the seal shall not be necessary to be
placed on, and its absence shall not impair the validity of, any document,
instrument or other paper executed and delivered by or on behalf of the Trust.
<PAGE> 13
9
ARTICLE VI
SHARES
SECTION 6.1. Issuance of Shares. The Trustees may issue Shares of any
or all Series either in certificated or uncertificated form, they may issue
certificates to the holders of Shares of a Series which was originally issued
in uncertificated form, and if they have issued Shares of any Series in
certificated form, they may at any time discontinue the issuance of Share
certificates for such Series and may, by written notice to such Shareholders of
such Series require the surrender of their Share certificates to the Trust for
cancellation, which surrender and cancellation shall not affect the ownership
of Shares for such Series.
SECTION 6.2. Uncertificated Shares. For any Series of Shares for which
the Trustees issue Shares without certificates, the Trust or the Transfer Agent
may either issue receipts therefor or may keep accounts upon the books of the
Trust for the record holders of such Shares, who shall in either case be
deemed, for all purposes hereunder, to be the holders of such Shares as if they
had received certificates therefor and shall be held to have expressly assented
and agreed to the terms hereof and of the Declaration.
SECTION 6.3. Share Certificates. For any Series of Shares for which the
Trustees shall issue Share certificates, each Shareholder of such Series shall
be entitled to a certificate stating the number of Shares owned by him in such
form as shall be prescribed from time to time by the Trustees. Such certificate
shall be signed by the President or a Vice President, and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary of the Trust.
Such signatures may be facsimiles if the certificate is countersigned by a
Transfer Agent, or by a Registrar, other than a Trustee, officer or employee of
the Trust. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall cease to be such officer before such
certificate is issued, it may be issued by the Trust with the same effect as if
he were such officer at the time of its issue.
SECTION 6.4. Lost, Stolen, etc., Certificates. If any certificate for
certificated Shares shall be lost, stolen, destroyed or mutilated, the
Trustees may authorize the issuance of a new certificate of the same tenor and
for the same number of Shares in lieu thereof. The Trustees shall require the
surrender of any mutilated certificate in respect of which a new certificate
is issued, and may, in their discretion, before the issuance of a new
certificate, require the owner of a lost, stolen or destroyed certificate, or
the owner's legal representative, to make an
<PAGE> 14
10
affidavit or affirmation setting forth such facts as to the loss, theft or
destruction as they deem necessary, and to give the Trust a bond in such
reasonable sum as the Trustees direct, in order to indemnify the Trust.
SECTION 6.5. Record Transfer of Pledged Shares. A pledgee of Shares
pledged as collateral security shall be entitled to a new certificate in his
name as pledgee, in the case of certificated Shares, or to be registered as the
holder in pledge of such Shares in the case of uncertificated Shares; provided,
that the instrument of pledge substantially describes the debt or duty that is
intended to be secured thereby. Any such new certificate shall express on its
face that it is held as collateral security, and the name of the pledgor shall
be stated thereon, and any such registration of uncertificated Shares shall be
in a form which indicates that the registered holder holds such Shares in
pledge. After such issue or registration, and unless and until such pledge is
released, such pledgee and his successors and assigns shall alone be entitled
to the rights of a Shareholder, and entitled to vote such Shares.
ARTICLE VII
CUSTODIAN
The Trust shall at all times employ a bank or trust company having a
capital, surplus and undivided profits of at least Two Million Dollars
($2,000,000) as Custodian of the capital assets of the Trust. The Custodian
shall be compensated for its services by the Trust upon such basis as shall be
agreed upon from time to time between the Trust and the Custodian.
ARTICLE VIII
AMENDMENTS
SECTION 8.1. By-Laws Subject to Amendment. These By-Laws may be altered,
amended or repealed, in whole or in part, at any time by vote of the holders of
a majority of the Shares (or whenever there shall be more than one Series of
Shares, of the holders of a majority of the Shares of each Series) issued,
outstanding and entitled to vote. The Trustees, by vote of a Majority of the
Trustees, may alter, amend or repeal these By-Laws, in whole or in part,
including By-Laws adopted by the Shareholders, except with respect to any
provision hereof which by law, the Declaration or these By-Laws requires action
by the Shareholders; provided, that no later than the time of giving notice of
the meeting of
<PAGE> 15
11
Shareholders next following the alteration, amendment or repeal of these
By-Laws, in whole or in part, notice thereof, stating the substance of such
action shall be given to all Shareholders entitled to vote. By-Laws adopted by
the Trustees may be altered, amended or repealed by the Shareholders.
SECTION 8.2. Notice of Proposal to Amend By-Laws Required. No proposal
to amend or repeal these By-Laws or to adopt new By-Laws shall be acted upon at
a meeting unless either (i) such proposal is stated in the notice or in the
waiver of notice, as the case may be, of the meeting of the Trustees or
Shareholders at which such action is taken, or (ii) all of the Trustees or
Shareholders, as the case may be, are present at such meeting and all agree to
consider such proposal without protesting the lack of notice.
____________________________________
<PAGE> 1
EXHIBIT 5
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this 20th day of December, 1994, by and
between AMERICAN CAPITAL FEDERAL MORTGAGE TRUST, a Massachusetts Business Trust
(hereinafter referred to as the "FUND"), and AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation (hereinafter referred to as the "ADVISER").
The FUND and the ADVISER agree as follows:
(1) Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the FUND's
Trustees and in conformity with applicable laws, the FUND's Agreement and
Declaration of Trust ("Declaration of Trust"), By-laws, registration
statements, prospectus and stated investment objectives, policies and
restrictions, shall:
a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the FUND's portfolio, and formulation and implementation of
investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the FUND's account with brokers or dealers selected
by the ADVISER;
c. conduct and manage the day-to-day operations of the FUND including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing
of routine legal services except for services provided by outside counsel to
the FUND selected by the Trustees, and the supervision of the FUND's Treasurer
and the personnel working under his direction; and
d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND trustee and FUND officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the FUND the most favorable price and
execution available and shall maintain records adequate to demonstrate
compliance with this requirement. Subject to prior authorization by the FUND's
Trustees of appropriate policies and procedures, the ADVISER may, to the extent
authorized by law, cause the FUND to pay a broker or dealer that provides
brokerage and research services to the ADVISER an amount of
<PAGE> 2
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction. In the event of such authorization and to the extent
authorized by law, the ADVISER shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of such action.
Except as otherwise agreed, or as otherwise provided herein, the FUND shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
FUND shall include (i) interest and taxes; (ii) brokerage commissions and other
costs in connection with the purchase and sale of portfolio investments; (iii)
compensation of its trustees and officers other than those who are affiliated
persons of the ADVISER; (iv) compensation of its Treasurer, compensation of
personnel working under the Treasurer's direction, and expenses of office
space, facilities, and equipment used by the Treasurer and such personnel in
the performance of their normal duties for the FUND which consist of
maintenance of the accounts, books and other documents which constitute the
record forming the basis for the FUND's financial statements, preparation of
such financial statements and other FUND documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the FUND's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the FUND selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the FUND and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the FUND; (xi) all other expenses incidental to holding meetings of the FUND's
shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the FUND's membership in
trade associations approved by the Trustees; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits or
proceedings to which the FUND is a party and the legal obligation which the
FUND may have to indemnify its officers and trustees with respect thereto. To
the extent that any of the foregoing expenses are allocated between the FUND
and any other party, such allocations shall be pursuant to methods approved by
the Trustees.
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<PAGE> 3
(2) Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the FUND are not impaired.
Except as otherwise required by the Investment Company Act of 1940 (the "1940
Act"), any of the shareholders, trustees, officers and employees of the FUND
may be a shareholder, trustee, director, officer or employee of, or be
otherwise interested in, the ADVISER, and in any person controlled by or under
common control with the ADVISER, and the ADVISER, and any person controlled by
or under common control with the ADVISER, may have an interest in the FUND.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties hereunder on the part
of the ADVISER, the ADVISER shall not be subject to liability to the FUND, or
to any shareholder of the FUND, for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
(3) Compensation Payable to ADVISER
The FUND shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, a monthly fee computed
at the following annual rates:
.50% on the first $1 billion of the FUND's average daily net assets; .475% on
the next $1 billion of the FUND's average daily net assets; .45% on the next $1
billion of the FUND's average daily net assets; .40% on the next $1 billion of
the FUND's average daily net assets; and .35% of any excess over $4 billion.
Average daily net assets shall be determined by taking the average calendar
month calculated in the manner provided in the FUND's Declaration of Trust.
Such fee shall be payable for each calendar month as soon as practicable after
the end of that month.
The fees payable to the ADVISER by the FUND pursuant to this Section 3 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of American Capital Management & Research, Inc., or
its successor, in connection with the purchase and sale of portfolio
investments of the FUND, less any direct expenses incurred by such person, in
connection with obtaining such commissions, fees, brokerage or similar
payments. The ADVISER shall use its best efforts to recapture all available
tender offer solicitation fees and exchange offer fees in connection with the
FUND's portfolio transactions and shall advise the Trustees of any other
commissions, fees, brokerage
3
<PAGE> 4
or similar payments which may be possible for the ADVISER or any other direct
or indirect majority owned subsidiary of American Capital Management &
Research, Inc., or its successor, to receive in connection with the FUND's
portfolio transactions or other arrangements which may benefit the FUND.
In the event that the ordinary business expenses of the FUND for any fiscal
year should exceed 1.5% of the first $30 million of the FUND's average daily
net assets plus 1% of any excess over $30 million, the compensation due the
ADVISER for such fiscal year shall be reduced by the amount of such excess. The
ADVISER's compensation shall be so reduced by a reduction or a refund thereof,
at the time such compensation is payable after the end of each calendar month
during such fiscal year of the FUND, and if such amount should exceed such
monthly compensation, the ADVISER shall pay the FUND an amount sufficient to
make up the deficiency, subject to readjustment during the FUND's fiscal year.
For purposes of this paragraph, all ordinary business expenses of the FUND
shall include the investment advisory fee and other operating expenses paid by
the FUND except (i) for interest and taxes; (ii) brokerage commissions; (iii)
as a result of litigation in connection with a suit involving a claim for
recovery by the FUND; (iv) as a result of litigation involving a defense
against a liability asserted against the FUND, provided that, if the ADVISER
made the decision or took the actions which resulted in such claim, it acted in
good faith without negligence or misconduct; (v) any indemnification paid by
the FUND to its officers and trustees and the ADVISER in accordance with
applicable state and federal laws as a result of such litigation; and (vi)
amounts paid to American Capital Marketing, Inc., the distributor of the FUND's
shares, in connection with a distribution plan adopted by the FUND's Trustees
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
(4) Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the FUND are the
property of the FUND and further agrees to surrender promptly to the FUND any
of such records upon the FUND's request. The ADVISER further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the Act.
(5) Duration of Agreement
This Agreement shall have an initial term of 2 years from the date hereof, and
shall continue in force from year to year thereafter, but only so long as such
continuance is approved at least annually by the vote of a majority of the
FUND's Trustees who are not
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<PAGE> 5
parties to this Agreement or interested persons of any such parties, cast in
person at a meeting called for the purpose of voting on such approval, and by a
vote of a majority of the FUND's Trustees or a majority of the FUND's
outstanding voting securities.
This Agreement shall terminate automatically in the event of its assignment.
The Agreement may be terminated at any time by the FUND's Trustees, by vote of
a majority of the FUND's outstanding voting securities, or by the ADVISER, on
60 days' written notice, or upon such shorter notice as may be mutually agreed
upon. Such termination shall be without payment of any penalty.
(6) Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the 1940 Act and
the Rules and Regulations thereunder, subject, however, to such exemptions as
may be granted to either the ADVISER or the FUND by the Securities and Exchange
Commission (the "Commission"), or such interpretive positions as may be taken
by the Commission or its staff, under the 1940 Act, and the term "brokerage and
research services" shall have the meaning given in the Securities Exchange Act
of 1934 and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the FUND's Trustees and
shareholders. A copy of the Agreement and Declaration of Trust of the FUND is
on file with the Secretary of State of The Commonwealth of Massachusetts, and
it is hereby agreed that this Agreement is executed on behalf of the Trustees
of the FUND as Trustees and not individually and that the obligations of this
Agreement are not binding upon any of the Trustees, officers or shareholders of
the FUND individually but are binding only upon the assets and property of the
FUND.
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<PAGE> 6
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
By: /s/ CURTIS W. MORELL
Name: Curtis W. Morell
Its: Vice President
AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By: /s/ NORI L. GABERT
Name: Nori L. Gabert
Its: Vice President
6
<PAGE> 1
EXHIBIT 6.1
UNDERWRITING AGREEMENT
between
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
and
AMERICAN CAPITAL MARKETING, INC.
THIS AGREEMENT made this 20th day of December, 1994, by and between AMERICAN
CAPITAL FEDERAL MORTGAGE TRUST, a Massachusetts business trust, hereinafter
referred to as the "Fund" and AMERICAN CAPITAL MARKETING, INC., a Texas
corporation, hereinafter referred to as the "Underwriter".
WHEREAS, the Fund proposes to issue its shares in three classes: Class A, Class
B and Class C, all as described in the Fund's current prospectus at the time of
sale;
W I T N E S S E T H:
In consideration of the mutual covenants herein contained and other good and
valuable consideration, the receipt whereof is hereby acknowledged, the parties
hereto agree as follows:
FIRST: The Fund hereby appoints the Underwriter as its exclusive agent for the
sale of shares of the Fund to the public through investment dealers in the
United States and throughout the world.
SECOND: The Fund shall not sell any of its shares except through the
Underwriter and under the terms and conditions set forth in paragraph FOURTH
below. Notwithstanding the provisions of the foregoing sentence, however,
(A) the Fund may issue its shares to any other investment company or personal
holding company, or to the shareholders thereof, in exchange for all or a
majority of the shares or assets of any such company;
(B) the Fund may issue its shares at net asset value to any shareholder of the
Fund purchasing such shares with dividends or other cash distributions received
from the Fund pursuant to an offer made to all shareholders; and
(C) the Fund may issue its shares at net asset value to its Trustees.
THIRD: The Underwriter hereby accepts appointment as exclusive agent for the
sale of all classes of shares of the Fund and agrees that it will use its best
efforts to sell such shares; provided, however, that:
(A) the Underwriter may, and when requested by the Fund shall, suspend its
efforts to effectuate sales for any or all classes of
1
<PAGE> 2
shares of the Fund or limit such sales efforts to existing shareholders of the
Fund at any time when, in the opinion of the Underwriter, after consultation
with the investment adviser to the Fund, or in the opinion of the Fund, sales
efforts should be limited or suspended because of market or other economic
considerations (including a determination by the Fund's investment adviser that
it would be in the best interests of existing shareholders of the Fund to
suspend sales of shares of the Fund or limit such sales to existing
shareholders of the Fund) or abnormal circumstances of any kind;
(B) upon the limiting or suspension of sales efforts by the Underwriter
pursuant to clause (A) above, the Fund may in its discretion suspend the sale
of shares through the Underwriter or limit such sales to existing shareholders
of the Fund; and
(C) the Fund may withdraw the offering of its shares (i) at any time with the
consent of the Underwriter, or (ii) without such consent when so required by
the provisions of any statute or of any order, rule or regulation of any
governmental body having jurisdiction. It is mutually understood and agreed
that the Underwriter does not undertake to sell any specific amount of shares
of the Fund. The Fund shall have the right to specify minimum amounts for
initial and subsequent orders for the purchase of shares.
FOURTH: The offering price of shares of the Fund (the "offering price") shall
be the net asset value per share plus, in the case of Class A shares, any
applicable initial sales charge. Net asset value per share shall be determined
in the manner provided in the then current prospectus of the Fund. The sales
charge for shares shall be established by the Underwriter. The Underwriter may
designate a scale of reducing sales charges on the basis of the value of shares
purchased or owned in accordance with Rule 22d-1 under the Investment Company
Act of 1940 (the "Act"). Included in the scale of reducing sales charges may
be a level at which no sales charges are added to the net asset value in
computing the public offering price. The Underwriter may also designate
eliminations of sales charges to particular classes of investors or
transactions in accordance with Rule 22d-1, provided such eliminations are
approved by the Fund and described in the prospectus. The Fund shall allow,
directly to investment dealers through whom shares of the Fund are sold, such
portion of the sales charge as may be payable to them and specified by the
Underwriter up to, but not exceeding, the amount of the total sales charge.
The difference between any portion of the sales charge so payable to investment
dealers and the total sales charges included in the offering price shall be
paid to the Underwriter.
The offering price of Class B and Class C shares of the Fund shall be the net
asset value per share without an initial sales charge. However, the Fund
agrees that the Underwriter shall impose certain
2
<PAGE> 3
contingent deferred sales charges in connection with the redemption of Class B
or Class C shares of the Fund, not to exceed a specified percentage of the
original purchase price of the shares as from time to time set forth in the
prospectus of the Fund. The Underwriter may retain (or receive from the Fund,
as the case may be) all of such contingent deferred sales charges. Net asset
value per share shall be determined in the manner provided in the then current
prospectus of the Fund. The Underwriter may designate eliminations of
contingent deferred sales charges to particular classes of investors or
transactions in accordance with Rule 22d-1 provided such eliminations are
approved by the Fund and described in the prospectus. The Underwriter proposes
to pay to investment dealers through whom Class B and Class C shares of the
Fund are sold a dealer commission of a specified percentage of the purchase
price of Class B and Class C shares purchased through them and as from time to
time set forth in the prospectus of the Fund.
The Underwriter shall act as agent of the Fund in connection with the sale and
repurchase of shares of the Fund. Except with respect to such sales and
repurchases, the Underwriter shall act as principal in all matters relating to
the promotion of the sale of shares of the Fund and shall enter into all of its
own engagements, agreements and contracts as principal on its own account. The
Underwriter shall enter into selling group agreements with investment dealers
selected by the Underwriter, authorizing such investment dealers to offer and
sell shares of the Fund to the public upon the terms and conditions set forth
therein, which shall not be inconsistent with the provisions of this Agreement.
Each selling group agreement shall provide that the investment dealer shall act
as a principal, and not as an agent of the Fund.
FIFTH: The Underwriter shall bear
(A) the expenses of printing from the final proof and distributing
registration statements and prospectuses relating to public offerings made by
the Underwriter pursuant to this Agreement and annual and semi-annual
shareowner reports used as sales literature (not, however, including
typesetting costs), as well as all printing and distribution costs of any other
sales literature used by the Underwriter or furnished by the Underwriter to
dealers in connection with such public offerings except as otherwise agreed by
the Board of Trustees;
(B) expenses of advertising in connection with such public offerings except as
otherwise agreed by the Board of Trustees; and
(C) all legal expenses in connection with the foregoing.
SIXTH: The Underwriter will accept orders for shares of the Fund only to the
extent of purchase orders actually received and not in excess of such orders,
and it will not avail itself of any opportunity of making a profit by
expediting or withholding orders.
3
<PAGE> 4
SEVENTH:
(A) The Fund and the Underwriter shall each comply with all applicable
provisions of the Act, the Securities Act of 1933 (the "Securities Act") and of
all other federal and state laws, rules and regulations governing the issuance
and sale of shares of the Fund.
(B) The Fund agrees to indemnify the Underwriter against any and all claims,
demands, liabilities and expenses which the Underwriter may incur under the
Securities Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any registration
statement or prospectus of the Fund, or any omission to state a material fact
therein, the omission of which makes any statement contained therein
misleading, unless such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund in connection therewith by
or on behalf of the Underwriter.
(C) The Underwriter agrees to indemnify the Fund against any and all claims,
demands, liabilities and expenses which the Fund may incur arising out of or
based upon any act or deed of the Underwriter or its sales representatives
which has not been authorized by the Fund in its prospectus or in this
Agreement. The Underwriter agrees to indemnify the Fund against any and all
claims, demands, liabilities and expenses which the Fund may incur under the
Securities Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any registration
statement or prospectus of the Fund, or any omission to state a material fact
therein if such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund in connection therewith by
or on behalf of the Underwriter.
(D) The Underwriter agrees to indemnify the Fund against any and all claims,
demands, liabilities and expenses which the Fund may incur under the Securities
Act, or common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in any prospectus of the Fund
prepared for use under Rule 482 of the Securities Act, or any omission to state
a material fact therein.
EIGHTH: Nothing herein contained shall require the Fund to take any action
contrary to any provision of its Declaration of Trust or to any applicable
statute or regulation.
NINTH: This Agreement shall become effective on the date hereof, shall have an
initial term of two years from the date hereof, and shall continue in force and
effect from year to year thereafter, provided, that such continuance is
specifically approved at least annually (a)(i) by the Board of Trustees of the
Fund, or (ii) by
4
<PAGE> 5
vote of a majority of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the Act); and (b) by vote of a majority of the Fund's Board
of Trustees who are not parties to this Agreement or interested persons (as
defined in Section 2(a)(19) of the Act) of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
TENTH:
(A) This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board of Trustees of the Fund or by vote of a majority
of the outstanding voting securities of the Fund, or by the Underwriter, on
sixty days written notice to the other party.
(B) This Agreement shall automatically terminate in the event of its
assignment (as defined in Section 2(a)(4) of the Act).
ELEVENTH: Any notice under this Agreement shall be in writing, addressed and
delivered, or mailed, postage paid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further
notice to the other party, it is agreed that the address of both the Fund and
the Underwriter shall be 2800 Post Oak Boulevard, Houston, Texas 77056.
TWELFTH: The Declaration of Trust establishing American Capital Federal
Mortgage Trust, dated September 9, 1985, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the name
"American Capital Federal Mortgage Trust" refers to the Trustees under the
Declaration collectively as Trustees, but not as individuals or personally; and
no Trustee, shareholder, officer, employee or agent of said Fund shall be held
to any personal liability, nor shall resort be had to their private property
for the satisfaction of any obligation or claim or otherwise in connection with
the affairs of said Fund, but the trust estate only shall be liable. The Fund
presently is comprised of one portfolio. All obligations of the Fund under
this Agreement shall apply only on a portfolio by portfolio basis and the
assets of one portfolio shall not be liable for the obligations of the other.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate on the day and year first above written.
AMERICAN CAPITAL MARKETING, INC.
By: /s/ FRED SHEPHERD
Name: Fred Shepherd
Its: Vice President
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
By: /s/ J. DAVID WISE
Name: J. David Wise
Its: Vice President and Assistant Secretary
6
<PAGE> 1
EXHIBIT 10
O ' M E L V E N Y & M Y E R S
4 0 0 S O U T H H O P E S T R E E T
L O S A N G E L E S , C A L I F O R N I A 9 0 0 7 1 - 2 8 9 9
TELEPHONE (213) 669-6000
FACSIMILE (213) 669-6407
April 19, 1995
WRITER'S DIRECT DIAL NUMBER OUR FILE NUMBER
(213) 669-6690 019,617-999
American Capital Federal Mortgage Trust
2800 Post Oak Boulevard
Houston, TX 77056
Ladies and Gentlemen:
At your request, we have examined the form of Post-Effective
Amendment No. 16 to Registration Statement No. 33-1705 to be filed by you with
the Securities and Exchange Commission on Form N-1A in connection with the
registration under the Securities Act of 1933 of 5,022,794 of your shares of
beneficial interest, $.01 par value (the "Shares"). We are familiar with the
proceedings taken and proposed to be taken by you in connection with the
authorization, issuance and sale of the Shares.
Based upon our examination and upon our knowledge of your
activities, it is our opinion that the Shares will, when issued and sold in the
manner described in the Registration Statement at a price in excess of par
value, be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Respectfully submitted,
/s/ O'MELVENY & MYERS
0'MELVENY & MYERS
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 16, Amendment No. 18 to the registration statement on Form N-1A
(the "Registration Statement") of our report dated February 16, 1995, relating
to the financial statements and financial highlights appearing in the December
31, 1994 Annual Report to Shareholders of American Capital Federal Mortgage
Trust, which are also incorporated by reference into the Registration Statement.
We also consent to the references to us under the headings "Financial
Highlights" and "Independent Accountants" in the Prospectus and under the
heading "Independent Accountants," in the Statement of Additional Information.
/s/
PRICE WATERHOUSE LLP
Houston, Texas
April , 1995
<PAGE> 1
EXHIBIT 15.1
CLASS A
DISTRIBUTION PLAN
OF
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
Section 1. American Capital Federal Mortgage Trust (the "Fund") may act as a
distributor of securities of which it is the issuer, pursuant to Rule 12b-1
under the Investment Company Act of 1940 (the "Act"), according to the terms of
this Distribution Plan (the "Plan").
Section 2. The Fund may incur as a distributor of securities of which it is
the issuer, expenses of up to twenty-five one-hundredths of one percent (0.25%)
per annum of the Fund's average daily net assets.
Section 3. Amounts set forth in Section 2 may be expended when and if
authorized in advance by the Fund's Trustees. Such amounts may be used to
finance any activity which is primarily intended to result in the sale of the
Fund's shares or the retention of shares by investors, including but not
limited to, expenses of organizing and conducting sales seminars, printing of
prospectuses and reports for other than existing shareholders, preparation and
distribution of advertising material and sales literature, supplemental
payments to dealers under a dealer incentive program to be established by
American Capital Marketing, Inc. ("Marketing") as the Fund's Distributor in
accordance with Section 4, and the costs of administering such a program. All
amounts expended pursuant to the Plan shall be paid to Marketing. Marketing
shall be required to use such amounts exclusively to finance those activities
set forth in Sections 3 and 4 of the Plan.
Section 4. (a) Amounts expended by the Fund under the Plan shall be used
primarily for the implementation by Marketing of a dealer incentive program.
(b) Pursuant to this program, Marketing may enter into agreements ("Servicing
Agreements") with such broker/dealers ("Dealers") as may be selected from time
to time by Marketing for the provision of distribution assistance in connection
with the sale of shares of the Fund ("Shares") to the Dealers' clients and
customers ("Customers") and for the provision of administrative support
services to Customers who may from time to time directly or beneficially own
Shares. The distribution assistance and administrative support services to be
rendered by Dealers under the Servicing Agreements may include, but shall not
be limited to, the following: distributing sales literature; answering routine
Customer inquiries concerning the Fund; assisting Customers in changing
dividend options, account designations and addresses, and in enrolling into the
pre-authorized check plan, systematic
<PAGE> 2
withdrawal plan or any of several tax sheltered retirement plans offered in
connection with the purchase of Shares; assisting in the establishment and
maintenance of Customer accounts and records and in the processing of purchase
and redemption transactions; investing dividends and capital gains
distributions automatically in Shares and providing such other information and
services as the Fund or the Customer may reasonably request.
Section 5. This Plan shall not take effect until it has been approved by a
vote of at least a majority (as defined in the Act) of the outstanding voting
securities of the Fund.
Section 6. This Plan shall not take effect until it has been approved,
together with any related agreements, by votes of the majority of both (a) the
Trustees of the Fund and (b) those Trustees of the Fund who are not "interested
persons" of the Fund (as defined in the Act) and have no direct or indirect
financial interest in the operation of this Plan or any agreements related to
it (the "Disinterested Trustees"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.
Section 7. Unless sooner terminated pursuant to Section 9, this Plan shall
continue in effect for a period of one year from the date it takes effect and
thereafter shall continue in effect so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Section 6.
Section 8. Marketing shall provide to the Fund's Trustees and the Trustees
shall review, at least quarterly, a written report of the amounts so expended
and the purposes for which such expenditures were made.
Section 9. This Plan may be terminated at any time by vote of a majority of
the Disinterested Trustees, or by vote of a majority of the Fund's outstanding
voting securities.
Section 10. Any agreement related to this Plan shall be in writing, and shall
provide:
(a) That such agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Disinterested Trustees, or by a vote of
the Fund's outstanding voting securities, on not more than sixty days' written
notice to any other party to the agreement; and
(b) That such agreement shall terminate automatically in the event of its
assignment.
Section 11. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in Section 2 hereof unless such amendment is
approved in the manner provided in Section 5 hereof, and no material amendment
to the Plan shall be
2
<PAGE> 3
made unless approved in the manner provided for in Section 6 hereof.
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
By: /s/ NORI L. GABERT
Name: Nori L. Gabert
Its: Vice President
Plan effective as of: December 15, 1988
as amended October 7, 1994
3
<PAGE> 1
EXHIBIT 15.2
CLASS B
DISTRIBUTION PLAN
OF
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
WHEREAS, American Capital Federal Mortgage Trust (the "Fund"), engaged in
business as an open-end management investment company and is registered as such
under the Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Fund proposes to commence an offering of Class B shares at net
asset value without initial sales charge but with a contingent deferred sales
charge ("CDSC");
WHEREAS, the Fund proposes to engage in activities which are primarily intended
to result in the distribution and sale of its Class B shares, to make payments
in connection with the distribution of its Class B shares and to engage
American Capital Marketing, Inc. ("Marketing") to act as principal underwriter
(as defined in the Act) of its Class B shares, and desires to adopt a Class B
Shares Distribution Plan pursuant to Rule 12b-1 under the Act;
WHEREAS, Marketing proposes to compensate broker-dealers or other persons for
providing distribution assistance in the offering of Class B shares and to
compensate financial and other industry professionals that provide services to
facilitate transactions in Class B shares for their clients (such
broker-dealers, other persons, financial institutions and other industry
professionals being collectively referred to as "Service Organizations");
WHEREAS, such compensation includes commissions to dealers and transaction fees
to other Service Organizations (such commissions and transaction fees being
collectively referred to as "Transactional Compensation"), plus supplemental
payments to Service Organizations ("Service Fees") pursuant to Servicing
Agreements proposed to be offered by Marketing to such Service Organizations;
WHEREAS, Marketing may provide additional promotional incentives to certain or
all Service Organizations and proposes to incur substantial additional expenses
in rendering distribution services for Class B shares, including but not
limited to, printing prospectuses and reports for other than existing
shareholders, preparation and distribution of advertising material and sales
literature, expenses of organizing and conducting sales seminars, and other
operating expenses;
WHEREAS, the Trustees of the Fund have determined that there is a reasonable
likelihood that adoption of this Class B Distribution
<PAGE> 2
Plan will benefit the Fund and its Class B shareholders;
NOW, THEREFORE, the Fund hereby adopts this Class B Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Act and containing the
following terms and conditions:
1. Subject to the supervision of the Board of Trustees of the Fund, Marketing
will provide the Fund with such distribution services and facilities as the
Fund may from time to time consider necessary to enhance the sale of its Class
B shares.
2. In consideration of the Transactional Compensation and Service Fees paid
and the other distribution services for Class B shares rendered by Marketing,
the Fund shall pay Marketing out of the assets attributable to the Class B
shares an annual distribution fee ("Distribution Fee") calculated daily and
payable weekly. The Distribution Fee shall equal on an annual basis 1.00% of
that portion of the Fund's net assets attributable to Class B shares. Only
distribution expenditures of a type and amount authorized in advance by the
Fund's Board of Trustees and properly attributable to the sale of Class B
shares will be used to justify any fee paid pursuant to this Plan.
3. This Plan shall not take effect until it has been approved by a vote of at
least a majority (as defined in the Act) of the outstanding Class B shares of
the Fund.
4. This Plan shall not take effect until it has been approved, together with
any related agreements, by votes of the majority of both (a) the Board of
Trustees of the Fund and (b) those Trustees of the Fund who are not "interested
persons" of the Fund (as defined in the Act) and have no direct or indirect
financial interest in the operation of this Plan or any agreements related to
it (the "Disinterested Trustees"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.
5. So long as the Plan remains in effect, the selection and nomination of
persons to serve as trustees of the Fund who are not "interested persons" of
the Fund shall be committed to the discretion of the Trustees then in office
who are not "interested persons" of the Fund.
6. Unless sooner terminated pursuant to Section 8, this Plan shall continue in
effect for a period of one year from the date it takes effect (which shall be
the date of the commencement of the public offering of Class B shares, provided
that the conditions of Sections 3 and 4 above have been met).
7. Marketing shall provide to the Fund's Board and the Board shall review, at
least quarterly, a written report of the expenses incurred hereunder and the
purposes for which such expenditures were made.
2
<PAGE> 3
8. The Plan may be terminated, without payment of any penalty, at any time by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the Fund.
9. Any agreement related to this Plan shall be in writing, and shall provide:
(a) That such agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Disinterested Trustees or by a vote of
the outstanding voting securities of the Fund, on not more than sixty days'
written notice to any other party to this agreement; and
(b) That such agreement shall terminate automatically in the event of its
assignment.
10. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in Section 2 hereof unless such amendment is
approved in the manner provided in Section 3 hereof, and no material amendment
to the Plan shall be made unless approved in the manner provided for in Section
4 hereof.
11. The Fund will preserve copies of the Plan, any agreement relating to the
Plan and any report made pursuant to Section 7 above, for a period of not less
than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
12. The execution of the Plan by officers of the Fund has been authorized by
both the Fund's Board of Trustees and the sole shareholder of the Class B
shares of the Fund. As provided in the Fund's Declaration of Trust dated
September 9, 1985, as amended from time to time (the "Trust Agreement"), in
undertaking these actions, the officers the Board of Trustees and the sole
Class B shareholder have each acted on behalf of the Trust. In addition, as
provided in the Trust Agreement, the obligations imposed under the Plan are
binding only upon the officers executing the Plan, the Fund's Board of Trustees
or the sole shareholder of the Class B shares of the Fund. The Trust Agreement
is on file with the secretary of the Commonwealth of Massachusetts.
American Capital Federal Mortgage Trust
By: /s/ NORI L. GABERT
Name: Nori L. Gabert
Its: Vice President
Plan effective as of: November 5, 1991
as amended October 7, 1994
3
<PAGE> 1
EXHIBIT 15.3
CLASS C
DISTRIBUTION PLAN
OF
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
WHEREAS, American Capital Federal Mortgage Trust (the "Fund"), engaged in
business as an open-end management investment company and is registered as such
under the Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Fund proposes to commence an offering of Class C shares at net
asset value without initial sales charge but with a contingent deferred sales
charge ("CDSC");
WHEREAS, the Fund proposes to engage in activities which are primarily intended
to result in the distribution and sale of its Class C shares, to make payments
in connection with the distribution of its Class C shares and to engage
American Capital Marketing, Inc. ("Marketing") to act as principal underwriter
(as defined in the Act) of its Class C shares, and desires to adopt a Class C
Shares Distribution Plan pursuant to Rule 12b-1 under the Act;
WHEREAS, Marketing proposes to compensate broker-dealers or other persons for
providing distribution assistance in the offering of Class C shares and to
compensate financial and other industry professionals that provide services to
facilitate transactions in Class C shares for their clients (such
broker-dealers, other persons, financial institutions and other industry
professionals being collectively referred to as "Service Organizations");
WHEREAS, such compensation includes commissions to dealers and transaction fees
to other Service Organizations (such commissions and transaction fees being
collectively referred to as "Transactional Compensation"), plus supplemental
payments to Service Organizations ("Service Fees") pursuant to Servicing
Agreements proposed to be offered by Marketing to such Service Organizations;
WHEREAS, Marketing may provide additional promotional incentives to certain or
all Service Organizations and proposes to incur substantial additional expenses
in rendering distribution services for Class C shares, including but not
limited to, printing prospectuses and reports for other than existing
shareholders, preparation and distribution of advertising material and sales
literature, expenses of organizing and conducting sales seminars, and other
operating expenses;
WHEREAS, the Trustees of the Fund have determined that there is a reasonable
likelihood that adoption of this Class C Distribution
<PAGE> 2
Plan will benefit the Fund and its Class C shareholders;
NOW, THEREFORE, the Fund hereby adopts this Class C Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Act and containing the
following terms and conditions:
1. Subject to the supervision of the Board of Trustees of the Fund, Marketing
will provide the Fund with such distribution services and facilities as the
Fund may from time to time consider necessary to enhance the sale of its Class
C shares.
2. In consideration of the Transactional Compensation and Service Fees paid
and the other distribution services for Class C shares rendered by Marketing,
the Fund shall pay Marketing out of the assets attributable to the Class C
shares an annual distribution fee ("Distribution Fee") calculated daily and
payable weekly. The Distribution Fee shall equal on an annual basis 1.00% of
that portion of the Fund's net assets attributable to Class C shares. Only
distribution expenditures of a type and amount authorized in advance by the
Fund's Board of Trustees and properly attributable to the sale of Class C
shares will be used to justify any fee paid pursuant to this Plan.
3. This Plan shall not take effect until it has been approved by a vote of at
least a majority (as defined in the Act) of the outstanding Class C shares of
the Fund.
4. This Plan shall not take effect until it has been approved, together with
any related agreements, by votes of the majority of both (a) the Board of
Trustees of the Fund and (b) those Trustees of the Fund who are not "interested
persons" of the Fund (as defined in the Act) and have no direct or indirect
financial interest in the operation of this Plan or any agreements related to
it (the "Disinterested Trustees"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.
5. So long as the Plan remains in effect, the selection and nomination of
persons to serve as trustees of the Fund who are not "interested persons" of
the Fund shall be committed to the discretion of the Trustees then in office
who are not "interested persons" of the Fund.
6. Unless sooner terminated pursuant to Section 8, this Plan shall continue in
effect for a period of one year from the date it takes effect (which shall be
the date of the commencement of the public offering of Class C shares, provided
that the conditions of Sections 3 and 4 above have been met).
7. Marketing shall provide to the Fund's Board and the Board shall review, at
least quarterly, a written report of the expenses incurred hereunder and the
purposes for which such expenditures were made.
2
<PAGE> 3
8. The Plan may be terminated, without payment of any penalty, at any time by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the Fund.
9. Any agreement related to this Plan shall be in writing, and shall provide:
(a) That such agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Disinterested Trustees or by a vote of
the outstanding voting securities of the Fund, on not more than sixty days'
written notice to any other party to this agreement; and
(b) That such agreement shall terminate automatically in the event of its
assignment.
10. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in Section 2 hereof unless such amendment is
approved in the manner provided in Section 3 hereof, and no material amendment
to the Plan shall be made unless approved in the manner provided for in Section
4 hereof.
11. The Fund will preserve copies of the Plan, any agreement relating to the
Plan and any report made pursuant to Section 7 above, for a period of not less
than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
12. The execution of the Plan by officers of the Fund has been authorized by
both the Fund's Board of Trustees and the sole shareholder of the Class C
shares of the Fund. As provided in the Fund's Declaration of Trust dated
September 9, 1985, as amended from time to time (the "Trust Agreement"), in
undertaking these actions, the officers the Board of Trustees and the sole
Class C shareholder have each acted on behalf of the Trust. In addition, as
provided in the Trust Agreement, the obligations imposed under the Plan are
binding only upon the officers executing the Plan, the Fund's Board of Trustees
or the sole shareholder of the Class C shares of the Fund. The Trust Agreement
is on file with the secretary of the Commonwealth of Massachusetts.
American Capital Federal Mortgage Trust
By: /s/ NORI L. GABERT
Name: Nori L. Gabert
Its: Vice President
Plan effective as of: May 10, 1993
as amended October 7, 1994
3
<PAGE> 1
EXHIBIT 16
COMPUTATION MEASURE FOR PERFORMANCE INFORMATION
CALCULATION OF TOTAL RETURN -- CLASS A SHARES
The Fund calculates its average annual total return quotations for Class A
shares for the period ended December 31, 1994, the date of the most recent
balance sheet included in the registration statement, by finding the average
annual compounded rates of return over the designated period or periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n=ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the designated period or periods, at the end of the designated
period or periods, or fractional portion thereof
</TABLE>
These calculations incorporate the following assumptions:
1. The maximum sales load, or other charges deducted from payments, is
deducted from the initial $1,000 payment.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period,
i.e., any sales load charged upon reinvestment of dividends would be
reflected.
3. All recurring fees, if any, charged to all shareholder accounts are
included.
4. The ending redeemable value assumes a complete redemption at the
end of the designated period or periods and the deduction of all
nonrecurring charges, if any, deducted at the end of such period or
periods.
<PAGE> 2
CALCULATION OF TOTAL RETURN -- CLASS B SHARES
The Fund calculates its average annual total return quotations for Class B
shares for the period ended December 31, 1994, the date of the most recent
balance sheet included in the registration statement, by finding the average
annual compounded rates of return over the designated period or periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n=ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the designated period or periods, at the end of the designated
period or periods, or fractional portion thereof
</TABLE>
These calculations incorporate the following assumptions:
1. Assumes an initial $1,000 payment with the applicable contingent
deferred sales charge imposed upon redemption.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period.
3. All recurring fees, if any, charged to all shareholder accounts are
included.
4. The ending redeemable value assumes a complete redemption at the
end of the designated period or periods and the deduction of all
nonrecurring charges, if any, deducted at the end of such period or
periods.
<PAGE> 3
CALCULATION OF TOTAL RETURN -- CLASS C SHARES
The Fund calculates its average annual total return quotations for Class C
shares for the period ending December 31, 1994, the date of the most recent
balance sheet included in the registration statement, by finding the average
annual compounded rates of return over the designated period or periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n=ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment made at the beginning
of the designated period or periods, at the end of the designated period or
periods, or fractional portion thereof
</TABLE>
These calculations incorporate the following assumptions:
1. Assumes an initial $1,000 payment with a one percent contingent
deferred sale charge imposed if redeemed during the first year.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period.
3. All recurring fees, if any, charged to all shareholder accounts are
included.
4. The ending redeemable value assumes a complete redemption at the
end of the designated period or periods and the deduction of all
nonrecurring charges, if any, deducted at the end of such period or
periods.
<PAGE> 4
CALCULATION OF YIELD
The Fund calculates its yield quotations based on a 30-day period ended on
the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
<TABLE>
<S> <C> <C>
a-b
YIELD (y) = 2[------ + 1)6 - 1]
cd
</TABLE>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- - ------------- ------------ ------------
<S> <C> <C>
a = $ 232,542 a = $ 100,144 a = $31,343
b = $ 56,339 b = $ 36,884 b = $11,536
c = 3,697,608 c = 1,592,660 c = 498,284
d = $ 12.17 d = $ 11.91 d = $ 11.90
y = 4.75% y = 4.04% y = 4.04%
</TABLE>
<PAGE> 1
EXHIBIT 18
MULTIPLE CLASS PLAN
This Multiple Class Plan ("Plan") adopted in accordance with Rule
18f-3 promulgated under the Investment Company Act of 1940 shall govern the
terms and conditions under which the investment companies listed on Exhibit A
attached hereto (the "Funds") may issue multiple classes of shares. The Funds
may issue, redeem, exchange and otherwise deal in multiple classes of their
shares subject to the terms, conditions and provisions described in the
exemptive application attached hereto as Exhibit B, which is incorporated
herein by reference.
<PAGE> 2
Exhibit A
American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
<PAGE> 3
Exhibit B
File No. 812-9014
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECOND AMENDED AND RESTATED APPLICATION
FOR AN ORDER PURSUANT TO
SECTION 6(c) OF THE INVESTMENT COMPANY ACT OF
1940 FOR AN EXEMPTION FROM THE PROVISIONS OF
SECTIONS 2(a)(32), 2(a)(35), 18(f),
18(g), 18(i), 22(c) AND 22(d) OF SUCH ACT AND
RULE 22c-1 THEREUNDER
American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
Van Kampen American Capital Asset Management, Inc.
Van Kampen American Capital Distributors, Inc.
2800 Post Oak Blvd., Houston, Texas 77056
(Address of Applicants' Principal Office)
Communications, Notice and Order to:
Nori L. Gabert
Vice President and Associate General Counsel
Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Blvd.
Houston, Texas 77056
(713) 993-4243
1
<PAGE> 4
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
<TABLE>
<S> <C>
- - ------------------------------------------------------------
In The Matter Of : Second Amended and Restated Application
: Pursuant to Section 6(c) of the Investment
American Capital Comstock Fund, Inc. : Company Act of 1940 for an order of
American Capital Corporate Bond Fund, Inc. : exemption from the provisions of Sections
American Capital Emerging Growth Fund, Inc. : 2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c)
American Capital Enterprise Fund, Inc. : and 22(d) of such Act and Rule 22c-1
American Capital Equity Income Fund, Inc. : thereunder.
American Capital Federal Mortgage Trust :
American Capital Global Managed Assets Fund, Inc. :
American Capital Government Securities, Inc. :
American Capital Growth and Income Fund, Inc. :
American Capital Harbor Fund, Inc. :
American Capital High Yield Investments, Inc. :
American Capital Municipal Bond Fund, Inc. :
American Capital Pace Fund, Inc. :
American Capital Real Estate Securities Fund, Inc. :
American Capital Reserve Fund, Inc. :
American Capital Tax-Exempt Trust :
American Capital Texas Municipal Securities, Inc. :
American Capital U.S. Government Trust for Income :
American Capital Utilities Income Fund, Inc. :
Van Kampen American Capital World Portfolio Series, Inc. :
American Capital Asset Management, Inc. :
Van Kampen American Capital Distributors, Inc. :
:
Investment Company Act of 1940, as amended :
File No. 812-9014 :
- - ------------------------------------------------------------
</TABLE>
American Capital Comstock Fund, Inc., American Capital Corporate Bond
Fund, Inc., American Capital Emerging Growth Fund, Inc., American Capital
Enterprise Fund, Inc., American Capital Equity Income Fund, Inc., American
Capital Federal Mortgage Trust, American Capital Global Managed Assets Fund,
Inc., American Capital Government Securities, Inc., American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc.,
2
<PAGE> 5
American Capital High Yield Investments, Inc., American Capital Municipal Bond
Fund, Inc., American Capital Pace Fund, Inc., American Capital Real Estate
Securities Fund, Inc., American Capital Reserve Fund, Inc. ("Reserve Fund"),
American Capital Tax- Exempt Trust, American Capital Texas Municipal
Securities, Inc., American Capital U.S. Government Trust for Income, American
Capital Utilities Income Fund, Inc. and American Capital World Portfolio
Series, Inc. and each portfolio thereof, and any future portfolios thereof that
will issue multiple classes of shares which are identical in all material
respects to the classes described herein, and any other open-end management
investment companies established or acquired in the future that are in the same
"group of investment companies" as that term is defined in Rule 11a-3 under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
which issue multiple classes of shares that are identical in all material
respects to the classes described herein (all of the above being referred to
collectively, in whole or in part, as the context requires, as the "Funds" or
"Fund"), Van Kampen American Capital Asset Management, Inc. (the "Adviser") and
Van Kampen American Capital Distributors, Inc. (the "Distributor") (all of the
foregoing being referred to collectively, in whole or in part, as the context
requires, as the "Applicants") hereby apply, pursuant to Section 6(c) of the
Investment Company Act for an order superceding certain prior orders of
exemption ("Prior Orders") issued by the Securities and Exchange Commission
(the "Commission") exempting the Funds other than Reserve Fund from the
provisions of Sections 18(f), 18(g) and 18(i) of the Investment Company Act so
that Reserve Fund may issue an unlimited number of classes of shares which
shall have differing voting rights, conversion rights and expense allocations,
as described below and to otherwise utilize the Multiple Distribution System
utilized by other Funds (the "Multiple Pricing System").
The Applicants hereby also apply for an order superceding the Prior
Orders pursuant to Section 6(c) of the Investment Company Act exempting the
Funds from the provisions of Sections 2(a)(32), 2(a)(35), 22(c) and 22(d) of
the Investment Company Act, and Rule 22c-1 thereunder, so that Reserve Fund may
impose a contingent deferred sales charge ("CDSC") in connection with the
redemption of shares of Reserve Fund as described below.
3
<PAGE> 6
On October 17, 1991 the Commission issued an order of exemption which
exempted the issuance and sale of two classes of shares by the Funds other than
Reserve Fund from Sections 18(f), 18(g) and 18(i) and from Sections 2(a)(32),
2(a)(35), 22(c) and 22(d) of the Investment Company Act and Rule 22c-1
thereunder, to the extent necessary or appropriate to permit the imposition of
a CDSC in connection with the redemption of the shares of the Funds (the
"Original Order").
On March 9, 1993, the Commission issued an order of exemption (the
"Amended Order") amending the Original Order to permit the Funds other than
Reserve Fund to issue an unlimited number of classes of shares, expand the
investor's exchange privileges, and permit Applicants to waive the CDSC in four
additional circumstances as described in the Fourth Amended and Restated
Application ("Prior Application") filed in connection with the amendment to the
Original Order. The two previous orders are referred to collectively herein as
the "Prior Orders."
An additional revision to certain procedures described in the Prior
Orders was effected via no action letter. Effective March 29, 1994, in
reliance on a no action letter issued by the staff of the Commission dated as
of that date (Reference No. 94-5-ICR), the Applicants revised the procedures
for calculating the CDSC period for Class B and Class C shares that are
exchanged into Reserve Fund by including the period during which such shares
are held in Reserve Fund in the CDSC time period. Previously the CDSC period
was tolled while such shares were held in Reserve Fund.
I.
PRELIMINARY STATEMENT
The Applicants are requesting exemptive relief from the above
provisions of the Investment Company Act in connection with a proposed revision
to the Multiple Pricing System. Under the Multiple Pricing System, certain of
the Funds currently offer investors the option of purchasing shares with (1) a
so-called "front-end" sales load together with an ongoing fee pursuant to a
plan of distribution adopted pursuant to Rule 12b-1 under the Investment
Company Act ("Rule 12b-1 Fee") at an annual rate of up to 0.25% of average
daily net assets (the "Front-End Option"), (2) subject to a CDSC and a Rule
12b-1 plan providing for a Rule 12b-1 Fee at an annual rate of up to
4
<PAGE> 7
1% of average daily net assets (the "Deferred Option") or (3) with either a
front-end sales load or at net asset value and subject, in either case, to a
CDSC and a Rule 12b-1 plan providing for a Rule 12b-1 Fee at an annual rate of
up to 1% of average daily net assets (the "Level Load Option")(1). With respect
to the Front-End Option, Reserve Fund proposes to impose a front-end load of
$0, or rather to offer Class A shares at net asset value.
The Multiple Pricing System was implemented by having certain of the
Funds create another class of shares so that such Funds may offer three classes
of shares, the Front-End Option offered through "Class A" shares, the Deferred
Option offered through "Class B" shares and the Level Load Option offered
through "Class C" shares. The classes each represent interests in the same
portfolio of investments of each Fund. The three classes are identical except
that (i) the Rule 12b-1 Fee payable by a Fund to the Distributor attributable
to each class pursuant to its particular Rule 12b-1 distribution plan adopted
by the Fund in accordance with Rule 12b-1 under the Investment Company Act is
higher for Class B and Class C shares; (ii) transfer agency costs attributable
to each class are higher for Class B and Class C shares; (iii) Class B and
Class C shares will bear any other expenses resulting from the deferred sales
arrangement subsequently identified which shall be approved by the Commission
pursuant to an amended order; (iv) the classes have different exchange
privileges; (v) only Class B and Class C shares have a conversion feature; and
(vi) each class votes separately as a class with respect to its particular Rule
12b-1 distribution plan. In addition, the Applicants have the authority to
exchange shares of each class of each Fund for shares of Reserve Fund and waive
the CDSC on certain redemptions as described below.
From time to time the Funds may create additional classes of shares.
These additional classes may differ from the classes specifically described
herein only in the following respects: (i) any such class may be subject to
different Rule 12b-1 Fee; (ii) any such class may bear different identifying
designations; (iii) any such class will have
____________________
(1) The Front-End Option, the Deferred Option and the Level Load Option are
currently offered as investment choices for American Capital Comstock Fund,
Inc., American Capital Corporate Bond Fund, Inc., American Capital Emerging
Growth Fund, Inc., American Capital Enterprise Fund, Inc., American Capital
Equity Income Fund, Inc., American Capital Global Managed Assets Fund, Inc.,
American Capital Government Securities, Inc., American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc., American Capital Municipal Bond Fund, Inc., American
Capital Pace Fund, Inc., American Capital Real Estate Securities Fund, Inc.,
American Capital Tax-Exempt Trust, American Capital Texas Municipal
Securities, Inc., American Capital Utilities Income Fund, Inc., American
Capital U.S. Government Trust for Income, and American Capital World Portfolio
Series, Inc. Reserve Fund offers its shares at net asset value and a Rule 12b-1
plan providing for a service fee at an annual rate of up to 0.15% of average
daily net assets. American Capital Federal Mortgage Trust currently offers
only the Front End Option and the Level Load Option.
5
<PAGE> 8
exclusive voting rights with respect to any Rule 12b-1 Plan adopted exclusively
with respect to such class except as provided in condition 15; (iv) any such
class may have different exchange privileges; (v) any such class may be subject
to incremental transfer agency costs attributable to such class; and (vi) any
such class may or may not have a conversion feature.(2) The existence of a
conversion feature for such additional classes will be determined on a
class-by-class basis. In no event would a class of shares have a conversion
feature that would automatically convert shares of such class into shares of a
class with a distribution arrangement that could be viewed as less favorable to
the shareholder from the point of view of overall cost. The purpose of the
conversion feature, as described herein, is to relieve the holders of such
shares that have been outstanding for a period of time sufficient for the
Distributor to have been substantially compensated for distribution expenses
related to such shares from most of the burden of such distribution-related
expenses.(3) No Fund, whether currently existing or newly created, would be
required to offer any additional classes, and it is contemplated that many
existing Funds will choose not to create any new classes.
The NASD Rules of Fair Practice ("NASD Rules") subject "asset-based"
sales charges, including Rule 12b-1 distribution fees and service fees, to
regulation as sales charges under those rules. The NASD Rules, among other
things, limit the annual "asset-based" distribution fees that an investment
company is able to impose to 0.75% of the investment company's average annual
net assets. However, a fund imposing such a fee is also able to impose an
annual 0.25% "service fee" if that amount is attributable to ongoing payments
made to broker-dealers for providing client services. In addition to the
annual limitations on distribution and service fees, the NASD Rules subject all
asset-based distribution fees and sales charges in the aggregate to an ongoing
cap of either 6.25% or 7.25% of total new gross sales(4) plus interest charges
on such amounts equal to prime rate plus one percent per annum, depending
____________________
(2) In the event any such class may be subject to any other incremental
expenses that should be properly allocated to such class, other than those
described herein for Class A shares, Class B shares or Class C shares as
the case may be, such class shall be submitted for approval by the Commission
pursuant to an amended order.
(3) See discussion herein at pages 14 and 15.
(4) As defined in the NASD Rules, the term "new gross sales" excludes
sales from reinvestment of distributions and exchanges of shares between
investment companies in a single complex, between classes of shares of an
investment company with multiple classes of shares or between series shares of
a series investment company.
6
<PAGE> 9
on whether or not the subject investment company also charges a service fee,(5)
and further limit the maximum allowable front-end or deferred sales charge
arising from individual transactions involving such investment companies to
6.25% and 7.25% of the amount invested, on the same basis.
The distribution structure for all classes of shares, as set forth
herein, will comply with applicable NASD regulations relating to "asset-based"
sales charges, including Rule 12b-1 distribution fees and service fees,
contained in the NASD Rules, as they may be amended or modified from time to
time. As described more fully above, the Rule 12b-1 Fee to which the various
classes of shares will be subject pursuant to their respective Rule 12b-1 plans
will not exceed the percentage limits promulgated by the NASD. In addition,
any service fees imposed will meet the NASD definition of service fee and are
included in the term "Rule 12b-1 Fee" previously defined. Furthermore,
aggregate sales charges and Rule 12b-1 distribution fees imposed with respect
to all applicable classes of shares will comply with the applicable percentage
caps relating to such charges on both a total gross sales and transactional
basis.
II.
DESCRIPTION OF THE APPLICANTS
1. The Funds. Each of the Funds is an open-end management investment
company registered under the Investment Company Act. The investment objectives
of each Fund are set forth in Exhibit A hereto. Each Fund has entered into or
will enter into an investment advisory agreement with the Adviser pursuant to
which, subject to the general supervision of the Directors(6) of the Fund, the
Adviser determines the investment of the Fund's assets, provides administrative
services and manages the Fund's business and affairs. Each Fund has entered
into or will enter into an underwriting agreement pursuant to which the
Distributor acts as principal underwriter for the Fund.
____________________
(5) The aggregate distribution fees and sales charges that may be imposed
by an investment company which has adopted a plan under which service fees are
paid shall not exceed 6.25% of total new gross sales; the aggregate
distribution fees and sales charges that may be imposed by an investment
company that does not pay a service fee is 7.25% of total new gross sales.
(6) The term "Directors" is used herein to refer both to the members of
the boards of directors of the funds that are organized as corporations, and
to the members of the boards of trustees of the funds that are organized as
business trusts.
7
<PAGE> 10
Shares of all of the Fund(7) other than Reserve Fund and American
Capital Federal Mortgage Trust are currently offered with the Front-End Option,
the Deferred Option and the Level Load Option.(8)
Class A shares of the Funds other than Reserve Fund may incur a sales
charge when they are purchased. Class A shares are subject to an ongoing
service fee at an annual rate of up to 0.25% of a Fund's aggregate daily net
assets attributable to the Class A shares.(9) Shares of Reserve Fund are
subject to an ongoing service fee at an annual rate of up to 0.15% of a Fund's
aggregate daily net assets.
Class B shares and Class C shares of the Funds other than Reserve Fund
do not incur a sales charge when they are purchased, but are subject to a sales
charge if they are redeemed within a specified period of time after purchase
(which may be at least three years but may not exceed six years). Class B
shares and Class C shares are subject to an ongoing Rule 12b-1 Fee at an annual
rate of up to 1.00% of a Fund's average daily net assets attributable to the
respective class. Class B shares and Class C shares will automatically convert
to Class A shares a certain number of years after the end of the calendar month
in which the shareholder's order to purchase was accepted. The CDSC is imposed
pursuant to the exemptive relief granted to the Funds other than Reserve Fund
in the Prior Orders.
As of September 30, 1994, the 20 Funds had aggregate net assets of
approximately $12 billion. Information as to the net assets of each of the
Funds is set forth in Exhibit B hereto.
2. The Adviser. The Adviser is an indirect wholly owned subsidiary
of Van Kampen American Capital, Inc. ("VKAC") which, in turn, is a wholly owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is
____________________
(7) See footnote 1.
(8) The Applicants obtained on order of exemption which permit the
Funds to impose and waive a CDSC on redemptions of their shares in certain
cases. See, American Capital Comstock Fund, Inc., et. al., IC-17889 (November
30, 1990). See footnote 1.
(9) For American Capital Corporate Bond Fund, Inc., American Capital
Emerging Growth Fund, Inc., American Capital Enterprise Fund, Inc., American
Capital Growth and Income Fund, Inc., American Capital Harbor Fund, Inc.,
American Capital High Yield Investments, Inc., American Capital Municipal Bond
Fund, Inc., and American Capital Pace Fund, Inc., payment of the Distribution
Fee is based on an annual percentage of the value of Fund shares held in
shareholder accounts at the rate of 0.15% annually with respect to shares in
such accounts on September 29, 1989 and 0.25% annually with respect to shares
purchased after that date. With respect to American Capital Equity Income
Fund, Inc., payment is based at the rate 0.15% annually with respect to shares
in such accounts on June 30, 1990, and 0.25% annually with respect to shares
purchased after that date. With respect to American Capital Comstock Fund, Inc.
a similar incremental rate of 0.15% applies to accounts opened as of October
19, 1992.
8
<PAGE> 11
controlled, through the ownership of a substantial majority of its common
stock, by The Clayton & Dubilier Private Equity Fund IV Limited Partnership
(the "C&D L.P.") a Connecticut limited partnership. C&D L.P. is managed by
Clayton, Dubilier & Rice, Inc., a New York private investment firm. The
general partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates
L.P. are Joseph L. Rice, III, B. Charles Ames, Alberto Cribiore, Donald J.
Gogel and Hubbard C. Howe, each of whom is a principal of Clayton, Dubilier &
Rice, Inc. In addition, certain officers, directors and employees of VKAC own
in the aggregate, not more than 6% of the common stock of VK/AC Holding, Inc.
and have the right to acquire, upon the exercise of options, approximately an
additional 10% of the common stock of VK/AC Holding, Inc. The Adviser is
registered with the Commission as an investment adviser under the Investment
Advisers Act of 1940 and provides investment advisory, administrative and
management services to the Funds.
3. The Distributor. The Distributor, an indirect wholly owned
subsidiary of Travelers, is registered as a broker/dealer under the Securities
Exchange Act of 1934.
III
THE AMENDED MULTIPLE PRICING SYSTEM
Based upon the recommendation of the Adviser and the Distributor, the
Directors, including a majority of the Independent Directors, of the Funds have
approved proposed amendments to the Multiple Pricing System that would allow
Reserve Fund to issue multiple classes of shares and impose a CDSC in the same
manner as permitted for other Funds. Under the Multiple Pricing System, as
amended, Reserve Fund and each of the other Funds would have the opportunity to
provide investors with the option of purchasing shares in one of three manners:
(1) with a conventional front-end sales load and subject to a Rule 12b-1 Fee
(Class A shares or Front-End Option), (2) subject to a CDSC for a specified
period of time (which may be at least three years but may not exceed six years)
and a Rule 12b-1 Fee (Class B shares or Deferred Option); such shares presently
have a conversion feature (between four and eight years), or (3) either with a
front-end sales load or at net asset value and subject, in either case, to a
CDSC for a specified period of time (which will be not more than five years)
and a Rule 12b-1 Fee (Class C shares or
9
<PAGE> 12
Level Load Option); such shares may have a conversion feature of not more than
twelve years.(10) With respect to the Front-End Option, Reserve Fund proposed to
impose a front-end load of $0, or rather to offer the shares at net asset
value. The Board of each of the Funds, including a majority of the Independent
Directors, has approved or will approve the creation and issuance of multiple
classes of shares and the offering of such class of shares by means of the
amended Multiple Pricing System,(11) although some Funds may not in fact create
or issue all such classes of shares. Each class of shares of a Fund will have
its respective Rule 12b-1 plan. The Board of each of the Funds, including a
majority of the Independent Directors, has approved or will approve the terms
of the respective Rule 12b-1 plans for Class A shares, for Class B shares and
for Class C shares. The Adviser, as the initial sole shareholder of each new
class of shares of each Fund, is expected to approve a specific distribution
plan for each class of shares prior to implementation of such plan. The
minutes of the meetings of the Boards of the Funds regarding the deliberations
of the Directors with respect to the approvals will reflect in detail the
reasons for determining that the amended Multiple Pricing System is in the best
interest of both the Funds and their respective shareholders.
The Applicants do not believe that the implementation of the revisions
to the Multiple Pricing System will give rise to any conflicts of interest. On
an ongoing basis, the Directors of each Fund, pursuant to their fiduciary
responsibilities under the Investment Company Act and otherwise, will monitor
each respective Fund for the existence of any material conflicts between the
interests of the holders of the different classes of shares.(12) The Board of
each Fund, including a majority of the Independent Directors, shall take such
action as is reasonably necessary to eliminate any such conflicts that may
develop. The Adviser and the Distributor agree that they will be responsible
for reporting any potential or existing conflicts to the Directors. If a
conflict arises, the Adviser and the Distributor at
____________________
(10) The front-end load, the CDSC and the sum thereof may vary between
zero and the amount permitted under applicable regulations.
(11) In determining whether to approve the offering of Fund shares by
means of the amended Multiple Pricing System, each Board will consider or has
considered the extent to which such system, as amended, can reasonably be
expected to improve the distribution of Fund shares and benefit the Fund and
its existing shareholders.
(12) In this regard, the fact that the method of allocating direct and
shared distribution expenses among the three classes with Rule 12b-1 plans is
largely, if not entirely, predetermined furtherserves to eliminate any
potential conflicts of interest.
10
<PAGE> 13
their own cost will remedy such conflict up to and including establishing a new
registered management investment company.
The Applicants believe that the interests of the multiple classes of
shares as to the advisory fee of each Fund participating in the Multiple
Pricing System are the same and not in conflict. These fees are used to
compensate the Adviser for providing management and advisory services that are
common to all investors, regardless of the class of shares held.(13)
Also, the Rule 12b-1 plan used in conjunction with the new class of
shares of each Fund offered with such a plan will be approved by both the Board
of the Fund and the initial sole shareholder prior to implementation. All
approvals of the Rule 12b-1 plans will be obtained pursuant to the requirements
of Rule 12b-1 both currently and as that rule may be modified in the future.
Class A shares may be purchased by investors at their then current net
asset value plus a front-end sales load, which in the case of Reserve Fund
would be $0. The sales loads are at rates competitive in the industry and
generally are subject to reductions for larger purchases, under a combined
purchase privilege, and under a right of accumulation or under a letter of
intent. The loads are subject to certain other reductions permitted by Section
22(d) of the Investment Company Act and Rule 22d-1 thereunder and set forth in
the registration statement of each Fund. The public offering price for the
Class A shares is computed in compliance with Rule 22c-1, Section 22(d) and
other relevant provisions of the Investment Company Act and the rules and
regulations thereunder.
In addition, Class A shareholders are assessed an ongoing Rule 12b-1
Fee under a Rule 12b-1 plan based upon a percentage of the average daily net
assets of the Class A shares. Proceeds from the front-end load and Rule
____________________
(13) It was noted by the Commission staff in Investment Company Act
Release Nos. 10862 (September 7, 1979) and 11414 (October 28, 1980), both
issued in connection with Rule 12b-1, that "legitimate profits" (i.e., profits
that are not "excessive" and are the result of contracts that have been duly
approved by the independent Directors/Trustees) are for an adviser to use as
it sees fit. Moreover, as the federal courts have recognized, Congress has made
it very clear in its legislative history that it rejected any concept that
Section 36(b) of the Investment Company Act should impose a "cost-plus basis"
as a standard or that the courts should engage in "rate making" for investment
advisers. See, Gartenberg v. Merrill Lynch Asset Management, Inc., 528 F.
Supp. 1038, 1045 (S.D.N.Y. 1981), aff'd. 694 F. 2d 932 (2d Cir. 1982). The
Adviser, therefore, is permitted to use legitimate profits to advertise the
Funds or for any other purpose. Any advertising expenditures paid out of the
Adviser's profits are not considered in the determination of advisory fees and
will not be presented to the Directors to support higher advisory or
management fees as to any class of shares of the Fund. Therefore, the
Applicants do not believe that this is an area where conflicts among the
classes of shares of the Funds participating in the Multiple Distribution
System are anticipated.
11
<PAGE> 14
12b-1 Fee are used by the Distributor primarily to pay initial commissions and
ongoing service fees to certain financial institutions (which may include
banks), securities dealers and other industry professionals (collectively,
"Service Organizations").(14)
The Prior Orders exempt the Applicants from Sections 2(a)(32),
2(a)(35), 22(c) and 22(d) of the Investment Company Act and Rule 22c-1
thereunder, to the extent necessary or appropriate to permit the imposition of
a CDSC in connection with redemptions of an unlimited number of classes of
shares. The CDSC applicable to such classes of shares are calculated as
described herein.
Under the Prior Orders the Funds other than Reserve Fund may create an
unlimited number of classes of shares and, specifically, three classes of
shares, Class A, Class B and Class C shares. Investors may purchase Class B
and Class C shares at their then current net asset value per share without the
imposition of a sales load at the time of purchase. Class B and Class C shares
are subject to a Rule 12b-1 Fee at an annual rate of up to 1% of average daily
net assets pursuant to a Rule 12b-1 plan. In addition, an investor's proceeds
from a redemption of Class B and Class C shares made within a specified period
(which may be at least three years but may not exceed six years for Class B
shares and is not expected to be more than five years for Class C shares)
(hereinafter such period referred to as the "CDSC Period") of his or her
purchase may be subject to a CDSC which is paid to the Distributor. Currently,
for Class B shares the percentage varies from a maximum of 5% for redemptions
made during the first year after purchase to 1% for redemptions made during the
fifth year since purchase. Currently, for Class C shares the rate is 1% on
shares redeemed during the first year after purchase and no CDSC is imposed on
shares held more than one year. However, the Prior Orders permit the Funds
other than Reserve Fund to impose other schedules with lower initial
percentages and different periods over which the CDSC is charged on the Class B
and Class C shares. The CDSC is subject to the conditions set forth in the
Prior Orders which are proposed to be superseded by this Application. This
Application also seeks to permit Reserve Fund to issue multiple classes of
shares under the same terms and conditions as the other Funds.
____________________
(14) No compensation will be paid at the time of sale of Class A shares
of Reserve Fund, because no sales load will be charged.
12
<PAGE> 15
Both Class B shares and Class C shares are designed to permit the
Distributor to pay Service Organizations selling shares of each Fund a
commission on the sale of the Class B shares and Class C shares. The public
offering price of Class B shares is, and the public offering price of the Class
C shares may be, the then current net asset value of such shares, as determined
in accordance with Rule 22c-1, Section 22(d) and other relevant provisions of
the Investment Company Act and the rules and regulations thereunder. Because
both Class B shares and Class C shares are subject to a CDSC, a Rule 12b-1 Fee
for a specified period of time following purchase, a Rule 12b-1 Fee after the
completion of the period subject to a CDSC, and to a Rule 12b-1 Fee if
converted to Class A shares, such shares are designed for investors intending
to hold their Fund shares for the designated period prior to any such
conversion.
Under each Fund's distribution plans, the Distributor will not be
entitled to any specific percentage of the net asset value of each class of
shares of the Fund or other specific amount. As described above, each Fund
will pay to the Distributor a Rule 12b-1 Fee pursuant to its distribution plans
at an annual rate of up to .25% of the average daily net assets of such Fund's
Class A shares and will pay up to 1% of the average daily net asset value of
such Fund's Class B shares and Class C shares. Under each Fund's distribution
plans, payments will be made only to reimburse the Distributor for expenses
incurred in providing distribution-related services (including, in the case of
the Class B shares and Class C shares, commission expenses as described in more
detail below) and service fees paid. Each Fund will accrue at a rate (but not
in excess of the applicable maximum percentage rate) which is reviewed by the
Fund's Board of Directors quarterly. Such rate is intended to provide for
accrual of expenses at a rate that will not exceed the unreimbursed amounts
actually expended for distribution by the Distributor on behalf of such Fund.
If for any fiscal year of a Fund the amount accrued by the Fund would exceed
the amount of distribution expenses incurred by the Distributor with respect to
such Fund during the fiscal year (plus, in the case of Class B shares and Class
C shares, prior unreimbursed commission-related expenses), then the rate of
accrual will be adjusted accordingly. In no event will the amount paid by the
Fund to the Distributor exceed the unreimbursed expenses previously incurred by
the Distributor in providing distribution- related services.
Proceeds from the Rule 12b-1 Fee will be used to compensate Service
Organizations in an amount of up to .25 of 1%, annualized, of the average daily
net assets of the Class A shares, Class B shares or Class C shares maintained
in the Fund by their customers and, in the case of Class B shares and Class C
shares, proceeds from the
13
<PAGE> 16
CDSC will be used to defray the expenses of the Distributor with respect to
providing distribution related services, including upfront and/or ongoing
commissions relating to the sale of Class B shares and Class C shares.
The proceeds from the CDSC imposed on Class B shares and Class C
shares will reduce the amount of distribution expense for which the Distributor
may be reimbursed. To the extent the Distributor does not use the Rule 12b-1
Fee or CDSC (including, in the case of Class B shares and Class C shares,
related interest or carrying charges) to fund payments to Service
Organizations, under the Front-End Option, the Deferred Option or the Level
Load Option, the Distributor may use the Rule 12b-1 Fee attributable to shares
of each class to defray its expenses incurred in distributing shares of that
class, including preparing, printing and distributing advertising and sales
literature and printing and distributing the Funds' prospectus and statement of
additional information and reports used in connection with the sale of the
shares of that class. Under the Front-End Option, distribution expenses
relating to the Class A shares accrued by the Distributor in one year may not
be reimbursed from the Rule 12b-1 Fee received from the Fund in subsequent
fiscal years.
It is contemplated that the amounts expended by the Distributor upon
the initial purchase of Class B shares and Class C shares will be in excess of
the amounts received from the Rule 12b-1 Fee and CDSC attributable to such
shares in any given year. While the Distributor would expect to be compensated
from these sources for distribution services over a period of years, there will
be no assurance that the independent Directors of the Funds will approve the
continuance of the Rule 12b-1 distribution plans (pursuant to which the
distribution fee is paid) from year to year. If the distribution plans for
either Class B shares or Class C shares were terminated the Funds would have no
obligation with respect to unreimbursed expenses (other than expenses accrued
but not yet paid) incurred by the Distributor in connection with the sale of
such Class B shares or Class C shares to investors.
Class B shares will and Class C shares of each Fund may automatically
convert to Class A shares a certain number of years after the end of the
calendar month in which the shareholder's order to purchase was accepted, in
the circumstances and subject to the qualifications described herein. After
any such conversion Class B and Class C shares will be subject to Rule 12b-1
Fees equal to those borne by Class A shares. The conversion feature and the
number of years applicable will be the same with respect to a particular class
of shares of each Fund. For Class B shares such number of years may be between
four and eight; for Class C shares such number of years may be not
14
<PAGE> 17
more than twelve. The purpose of the conversion feature is to relieve the
holders of Class B shares and Class C shares that have been outstanding for a
period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares and Class C
shares from most of the burden of such distribution-related expenses. Thus,
Class A shares will consist of shares purchased by investors prior to the
implementation of the Multiple Pricing System, shares purchased pursuant to the
Front-End Option, Class B shares and Class C shares (including Class B shares
and Class C shares purchased through the reinvestment of dividends and other
distributions in respect of Class B shares and Class C shares) that have
converted to Class A status, and shares purchased by holders of outstanding
Class A shares through the reinvestment of dividends and distributions paid in
respect of those outstanding Class A shares.
The conversion feature of shares purchased through the reinvestment of
dividends and distributions paid in respect of Class B shares and Class C
shares differs from the conversion feature described in the preceding paragraph
(which applies to Class B shares and Class C shares purchased other than
through reinvestments). Shares purchased through the reinvestment of dividends
and other distributions in respect of Class B shares and Class C shares will be
treated as Class B shares or Class C shares, respectively, for purposes of the
additional Rule 12b-1 Fee. However, for purposes of conversion to Class A, all
shares in a shareholder's account which were purchased through the reinvestment
of dividends and distributions paid in respect of Class B shares or Class C
shares, respectively, (and which have not converted to Class A shares as
provided in the following sentence) will be considered held in a separate
sub-account. Each time any Class B shares or Class C shares in the
shareholder's account (other than those in the sub-account referred to in the
preceding sentence) convert to Class A, an equal pro rata portion of the Class
B shares or Class C shares in the sub-account will also convert to Class A.
The Funds have, or will have, obtained an opinion of counsel or
private letter ruling that the assessment of the additional distribution fee
and transfer agency costs and any other special allocations described above
with respect to Class B shares and Class C shares does not result in any
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code of 1986, as amended ("IRC"), and that the conversion of
Class B shares and Class C shares to Class A shares does not constitute a
taxable event under current federal income tax law. The conversion of Class B
shares and Class C shares to Class A shares may be suspended if an opinion or
ruling is no
15
<PAGE> 18
longer available at the time such conversion is to occur that such conversion
does not constitute a taxable event. In that event, no further conversions of
Class B shares or Class C shares would occur, and shares might continue to be
subject to the additional Rule 12b-1 Fee for an indefinite period which may
extend beyond the time at which the conversion of the shares would otherwise
have occurred.
Currently the Distributor furnishes the Directors of the Funds with
quarterly statements of distribution revenues and expenditures ("Statements")
(in accordance with the requirements of paragraph (b)(3)(ii) of Rule 12b-1) to
enable the Directors to make the findings required by paragraphs (d) and (e) of
Rule 12b-1. After implementation of the Multiple Pricing System, the Directors
will receive Statements which will set forth distribution revenues and
expenditures with respect to each class. In the Statements, only distribution
expenditures properly attributable to the sale of either the Class A, Class B
or Class C shares will be used to support the Rule 12b-1 Fee charged to
shareholders of such class of shares. Expenditures not related to the sale of
a particular class will not be presented to the Directors to support the Rule
12b-1 Fee charged to shareholders of such class of shares. Distribution
expenses attributable to the sale of the three classes of shares will be
allocated to each class of shares based upon the ratio in which the sales of
each class of shares bears to the sales of all the shares of each Fund. For
this purpose, shares issued upon reinvestment of dividends or distributions or
upon conversion from Class B shares or Class C shares to Class A shares will
not be considered sales.
On a quarterly basis, the Directors will receive Statements containing
sufficient information in order that they may generally monitor distribution
revenues and expenditures with respect to each class. On an annual basis, the
Directors will receive annual Statements which set forth the distribution
revenues received by the Distributor from the Rule 12b-1 Fee, the CDSC, and the
sales load and the distribution expenses to be considered by the Directors in
determining that there is a reasonable likelihood that each Rule 12b-1 plan
will benefit the Funds and their respective shareholders. The Applicants
undertake that the Directors of the Funds will receive the quarterly and annual
statements complying with paragraph (b)(3)(ii) of Rule 12b-1, as it may be
amended from time to time. The Statements, including the allocations on which
they are based, will be subject to the review and approval of the independent
Directors in exercise of their fiduciary duties under Rule 12b-1.
16
<PAGE> 19
In their analysis of the reasonableness of the advisory fee and the
Rule 12b-1 Fee under Section 36(b) of the Investment Company Act, the Directors
shall be mindful of the fact that while the advisory fee is borne by all
shares, the Rule 12b-1 Fee attributable to each class will be borne only by the
shareholders of that class. Consequently, only distribution expenditures
properly attributable to the sale of a particular class will be used to support
the Rule 12b-1 Fee charged to shareholders of such class of shares.
Expenditures not related to the sale of a particular class will not be
presented to the Directors to support the Rule 12b-1 Fee attributable to
shareholders of such class of shares.
The decision as to whether a particular distribution expenditure or
category of distribution expenditures is properly attributable to the sale of a
particular class or to the sale of multiple classes of shares (and thus
allocated to each class of shares in accordance with the method described
above) will be subject to the review and approval of the Directors. Currently,
it is anticipated that all distribution expenditures will be determined to be
attributable to the sale of all classes of shares except (i) commission
expenses related to the sale of the Class B shares or Class C shares and (ii)
Rule 12b-1 Fee payments (which will be separately calculated with respect to
each class). In the future, however, the Directors may determine that
particular distribution expenditures, in addition to the two categories listed
in the immediately preceding sentence, are attributable to the sale of a
particular class. The Statements will disclose whether the distribution
expenditures listed are attributable to the sale of a particular class or to
the sale of multiple classes of shares.
It is noted that Service Organizations will be compensated differently
as a result of whether an investor chooses the Front-End Option, the Deferred
Option or the Level Load Option. In the case of the Front-End Option, a
Service Organization will receive out of the purchase price some of its
compensation in connection with the sale of Class A shares at the time of the
sale of the shares(15) and some continuing compensation and/or Rule 12b-1 Fee
for as long as the investor remains a holder of such shares. The compensation
which the Service Organization receives at the time of the sale of the shares
will be based upon the amount of the applicable front-end sales load. In the
case of the Deferred Option or the Level Load Option, a Service Organization
will receive some compensation
____________________
(15) See Footnote 14
17
<PAGE> 20
from the Distributor in connection with the sale of either Class B shares or
Class C shares at the time of the sale of the shares and some continuing
compensation or a Rule 12b-1 Fee for as long as the investor remains a holder
of such shares. The relative size of a Service Organization's compensation
will vary from case to case depending on breakpoints, length of payment of a
service fee, etc. Accordingly, it is not possible to generalize as to which
class will provide the Service Organization with the highest level of
compensation. The Applicants will include a statement in each Fund's
prospectus to the effect that Service Organizations may receive different
compensation for selling Class A, Class B or Class C shares. Also, the
Distributor will adopt compliance standards, as to when Class A, Class B and
Class C shares may appropriately be sold to particular investors. Applicants
will require all Service Organizations selling shares of the Funds to agree to
conform to such standards.
The disparity in sales compensation is not unique to the Multiple
Pricing System. The Service Organization typically sells a vast variety of
other different financial products that provide for different compensation.
Furthermore, the Service Organization may refer a client to innumerable
non-mutual fund products, including equities, bonds, unit investment trusts,
real estate partnerships, buy-write programs, etc., which may be subject to
different compensation arrangements. It is, of course, not feasible for all
the compensation arrangements for all these competing investment products to be
described to a potential investor. Rather, the fiduciary responsibilities of
securities professionals to their clients and the selection of particular
investment products is ultimately a compliance matter.
Each class of shares of each Fund will have identical voting,
dividend, liquidation and other rights, preferences, powers, restrictions,
limitations, qualifications, designations and terms and conditions, except that
(i) Class B shares and Class C shares may be subject to a higher Rule 12b-1 Fee
than Class A shares; (ii) Class B shares and Class C shares will be subject to
higher transfer agency costs and any other incremental expenses resulting from
the deferred sales arrangement subsequently identified which shall be approved
by the Commission pursuant to an amended order; (iii) only Class B shares will
have and Class C shares may have a conversion feature; (iv) the classes will
have different exchange privileges; and (v) each class will vote separately as
a class with respect to such Fund's Rule 12b-1 distribution plans, except as
provided in condition 15.
18
<PAGE> 21
On a daily basis, the investment income will be allocated pro rata to
each class on the basis of the relative net asset value of the respective
classes. All expenses incurred by the Funds not attributable to a specific
class will be allocated pro rata to each class on the basis of the relative net
asset value of the respective classes except for the expenses of the
distribution plan and incremental transfer agency costs, which will be borne by
Class B or Class C, respectively. Because of the additional expenses that will
be borne solely by Class B or Class C, the net income attributable to and the
dividends payable on either Class B or Class C shares are expected to be lower
than the net income attributable to and the dividends payable on Class A
shares. To provide an example, if the Rule 12b-1 Fee payable by Class A was at
the annual rate of 0.25% of the net asset value of the Class A shares and the
Rule 12b-1 Fee payable by Class B or Class C was at the annual rate of 1% of
the net asset value of such class, and the net income and dividend rate prior
to the imposition of such Rule 12b-1 Fee was 6%, the dividend rate would be
5.75% on the Class A shares and 5% on the Class B shares and 5% on Class C
shares (assuming for this example no incremental transfer agency costs). The
net asset value per share of the Class A, Class B, and Class C shares are
expected to be substantially the same. Under certain circumstances, however,
the per share net asset value of the Class B and Class C shares may differ from
the per share net asset value of the Class A shares, reflecting the daily
expense accruals of the incremental Rule 12b-1 Fee and transfer agency fees
applicable with respect to the Class B and Class C shares and the differential
in the dividends paid on the three classes of shares.
The Applicants have established the manner in which the net asset
value of the three classes of shares will be determined and the manner in which
dividends and distributions will be paid. Attached hereto as Exhibit C is a
revised procedures memorandum and worksheets with respect to the net asset
value and dividends and distributions determinations.
The Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for calculating the net asset
value and the dividends and distributions of the three classes and that the
proper allocation of income and expenses among the classes under the amended
Multiple Pricing System has been reviewed by an expert (the "Expert")(16) who h
as rendered a report to Applicants, which has been provided to the
____________________
(16) Price Waterhouse served as the Expert in connection with the Amended
Order and has rendered the initial report for the Applicants in connection
with the amended Multiple Pricing System. It is expected that such firm will
render the ongoing reports.
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<PAGE> 22
staff of the Commission, that such methodology and procedures are adequate to
ensure that such calculations and allocations will be made in an appropriate
manner, subject to the conditions and limitations in that report. On an
ongoing basis, the Expert, or an appropriate substitute Expert, will monitor
the manner in which the calculations and allocations are being made and, based
upon such review, will render at least annually a report to the Funds that the
calculations and allocations are being made properly. The Applicants agree to
take immediate corrective action if this representation is not concurred in by
the Expert or appropriate substitute Expert.
The reports of the Expert shall be filed as part of the periodic
reports filed with the Commission pursuant to Sections 30(a) and 30(b)(1) of
the Investment Company Act. The work papers of the Expert with respect to such
reports, following request by the Funds (which the Funds agree to make), will
be available for inspection by the Commission staff upon the written request
for such work papers by a senior member of the Division of Investment
Management, limited to the Director, an Associate Director, and any Regional
Administrators or Associate and Assistant Administrators. The initial report
of the Expert is a "report on policies and procedures placed in operation and
the ongoing reports will be reports on "policies and procedures placed in
operation and tests of operating effectiveness" as defined and described in the
Statement of Auditing Standards No. 70 ("SAS No. 70") of the American Institute
of Certified Public Accountants (the "AICPA") , as it may be amended from time
to time, or in similar auditing standards as may be adopted by the AICPA from
time to time.
The Applicants will maintain the records of calculations of net asset
value, dividends and distributions, expenses and expense allocations in
connection with the multiple classes of shares of the Funds for a period of not
less than six years, the first two years in an easily accessible place, and
such calculations will be available for inspection by the Commission staff
during such time period.
Another difference among the Class A, Class B and Class C shares will
be the terms of the exchange privilege applicable to the shares. Under the
Amended Order, shares of each class of each Fund other than Reserve Fund may be
exchanged for shares of the same class of another Fund or for shares of Reserve
Fund. Reserve Fund shares are exchangeable for Class A shares of a Fund or, if
the Reserve Fund shares were originally acquired in exchange for Class B or
Class C shares of a Fund, those Reserve Fund Shares are exchangeable only for
the class of shares involved in the original exchange into Reserve Fund shares.
When the common stock of Reserve Fund
20
<PAGE> 23
is reclassified into three classes, all the currently outstanding Reserve Fund
shares will be classified as Class A shares. Some of those Reserve Fund shares
were acquired in exchange for Class B or Class C shares of other Funds.
However, under the Amended Order Class A shares of a Fund may generally only be
exchanged for Class A shares of another Fund. Therefore, if a special
exception is not created for Reserve Fund any current shareholders who
originally acquired their Reserve Fund shares in exchange for Class B or Class
C shares of another Fund would be adversely affected because they would no
longer be able to exchange their Reserve Fund shares for Class B or Class C
shares of another Fund. They would have to redeem those shares and purchase
shares of another Fund with the proceeds. Depending on how long they held
their Reserve Fund shares they may incur a CDSC. Alternatively, their Reserve
Fund shares could be converted to Class A shares upon reclassifying Reserve
Fund's shares, but in that case these shareholders could receive an
inappropriate windfall and the Distributor would be unfairly and unnecessarily
disadvantaged. The Applicants want to solve this problem by altering the
exchange conditions so that Class A shares of Reserve Fund that were originally
acquired before the reclassification of Reserve Fund shares in exchange for
Class B or Class C shares of another Fund may be exchanged for Class B or Class
C shares, respectively, of a Fund, just as is currently the case for Reserve
Fund under the Amended Order. Any Reserve Fund shareholder who did not
originally acquire his shares in exchange for Class B or Class C shares of
another Fund will be able to exchange his shares for Class A shares of another
Fund, also just as is currently the case for Reserve Fund under the Amended
Order.(17)
Only such shares held in Reserve Fund immediately prior to the
reclassification of its shares will be affected by this special exchange
procedure. After Class B and Class C shares of Reserve Fund are available for
public distribution, exchanges into Reserve Fund will be handled the same as
exchanges into any other Fund. Class A, Class B and Class C shares of a Fund
will only be exchangeable for the same class of shares of Reserve Fund. Class
B and Class C shares of Reserve Fund will be exchangeable for Class B or Class
C shares, respectively, of another Fund.
____________________
(17) In connection with such an exchange the shareholder must pay the
excess, if any, of the sales charge rate applicable to the shares being
acquired over the sales charge rate, if any, previously paid.
21
<PAGE> 24
The exchange privileges applicable to the various classes will comply
with Rule 11a-3 under the Investment Company Act. Various Funds presently
require a 30 day holding period prior to an exchange and presently impose an
exchange fee of $5 per exchange transaction.
The Multiple Pricing System permits investors to choose the method of
purchasing shares that is most beneficial given the amount of their purchase,
the length of time the investor expects to hold his or her shares and other
relevant circumstances. By offering the investor the choice of either a
Front-End Option, a Deferred Option or a Level Load Option within the same
fund, the Multiple Pricing System enables the investor to choose the sales
financing method which best suits his or her particular situation. For
example, certain investors may be better off paying a front-end load rather
than incurring deferred charges either because they are entitled to a reduced
load or because of the length of time the investor intends to maintain his
investment in a Fund.
IV
RATIONALE FOR MULTIPLE PRICING SYSTEM AND
AMENDMENT OF THAT SYSTEM
Investment companies and their principal underwriters essentially have
three alternative methods available to market and distribute shares to the
investing public. The front-end sales load arrangement exemplifies the method
which, historically, has predominated in the mutual fund industry --
distribution through one or more broker-dealers which have entered into dealer
agreements with the fund's principal underwriter. This type of marketing
effort relies on the promotion of the fund by the dealer and active
solicitation of the dealer's clients by its brokers or other sales personnel.
Since mutual funds compete with the universe of other investment alternatives
offered by brokers to their clients, compensation of the broker is an essential
element in the marketing of a fund through a dealer network. Until recently,
such compensation was accomplished by the dealer charging the customer a sales
commission or "load" on the purchase of fund shares and crediting a commission
to the broker making the sale.
A second method of marketing fund shares to the public relies
primarily on the extensive use of print, other mass media advertising, and
direct mail solicitation. The marketing expenses are borne by either the
fund's principal
22
<PAGE> 25
underwriter or investment adviser or, in some cases, by the fund itself. In
this second method of marketing, shares are not sold through broker-dealers.
Since the marketing effort does not rely on a dealer's sales personnel
compensated on a commission basis, such funds may be sold to the public at net
asset value per share without any sales load to the investor.
Each of these distribution methods offers certain advantages to the
investor. No-load funds offer the obvious advantage of saving the investor the
expense of a sales charge with the total amount of the purchase price being
invested in the fund. While funds sold through dealer networks with
traditional sales charges cannot compete with no-load funds on a cost basis,
the typical investor in such funds has access to the investment expertise,
experience and research facilities of his securities firm and the personalized
service of his broker.
In 1982, a third distribution method was implemented for the
conventional mutual fund sold through securities dealers which permits an
investor to purchase shares of such funds through his dealer without the
investor being assessed a front-end load but which nevertheless provides the
dealer with the revenue necessary to compensate its brokers at rates comparable
to those historically paid by load funds. This distribution mechanism combines
the CDSC with a Rule 12b-1 distribution plan. As is the case with a front-end
load fund, the dealer shares with the broker the commission on the sales of
fund shares received from the fund's distributor. The distributor is in turn
compensated over a period of several years for its marketing effort, including
its out-of- pocket commission expenses, by means of a Rule 12b-1 Fee
periodically paid by the fund at a rate based on the fund's average daily net
assets or some portion thereof. Each shareholder of the fund in effect bears
his or her proportionate share of the fee. Since "early" redemptions of shares
(i.e., those occurring within three to six years of purchase) could preclude
the distributor from receiving sufficient revenue under the distribution plan
to justify the expense of the initial sale and the ongoing services provided to
the investor, the fund deducts a CDSC from the proceeds of such "early"
redemption and pays all or a portion of the charge to the distributor. The
amount of the CDSC payable on a redemption declines each year following the
initial purchase, and typically, after four to six years, a redemption would
not be subject to any CDSC.
The response of investors to this deferred distribution mechanism has
been favorable. As a result, since 1982 an increasing number of funds which
are sold through broker-dealers have featured a CDSC and a Rule 12b-1
23
<PAGE> 26
distribution plan rather than a traditional front-end sales load. In addition,
many existing funds have converted their front-end sales load arrangement to
this method of selling shares.
In order to address the differing requirements and preferences of
potential investors, a number of the Adviser's competitors have reorganized or
are in the process of reorganizing the mutual funds managed or distributed by
them, including their money market funds like Reserve Fund, to offer two or
more classes of shares featuring, with some variations, distribution
arrangements similar to the Front-End Option, and the Deferred Option and the
Level Load Option. The opportunity to purchase shares pursuant to any of these
three options has distinct advantages for investors.
The purpose of adding Class B and Class C shares in Reserve Fund is to
enable an investor to directly purchase Class B and Class C shares in Reserve
Fund and later exchange such shares into other Funds' Class B or Class C
shares. Under the Amended Order, shares of Reserve Fund may only be exchanged
for Class A shares of a Fund. This modification to the present structure
provides greater flexibility for those investors who want a "safe harbor" for
their investment until they select a more permanent investment, and extends the
systematic exchange functionality to Class B and Class C shares. Current
Reserve Fund shareholders will not be adversely affected because following the
reclassification of Reserve Fund shares they will hold Class A shares that are
functionally equivalent to the shares they now hold and there will be no
changes in the fees to which they are subject. Furthermore, several other
money market funds offer the flexibility of multiple classes of shares and
Reserve Fund is at a competitive disadvantage because it does not.(18)
V
EXEMPTION FROM SECTIONS 18(f), 18(g) AND
18(i) UNDER THE INVESTMENT COMPANY ACT
____________________
(18) For example, see SunAmerica Money Market Securities, Inc. [Sun
American Capital Appreciation Fund, Inc., et al., Investment Company Act
Release Nos. 19579 (July 21, 1993) (notice) and 19631 (August 17, 1993)
(order)]; Putnam Daily Dividend Trust [Putnam Adjustable Rate U.S. Government
Fund, et al., Investment Company Release Nos. 18637 (March 30, 1992) (notice)
and 18676 (April 24, 1992) (order)]; MetLife - State Street Money Market Trust
[MetLife - State Street Equity Trust , et al., Investment Company Act Release
Nos. 19227 (January 22, 1993) (notice) and 19268 (February 17, 1993) (order)]
24
<PAGE> 27
The Applicants are requesting an exemptive order to the extent that
the proposed issuance and sale of an unlimited number of classes of shares
representing interests in the Funds might be deemed (i) to result in the
issuance of a "senior security" within the meaning of Section 18(g) of the
Investment Company Act and thus to be prohibited by Section 18(f)(1) of the
Investment Company Act and (ii) to violate the equal voting provisions of
Section 18(i) of the Investment Company Act.
Section 18(f)(1) provides, with certain exceptions not here relevant,
that "it shall be unlawful for any registered open- end company to issue any
class of senior security or to sell any senior security of which it is the
issuer . . . ." Section 18(g) provides:
Unless otherwise provided: "Senior security" means any bond,
debenture, note, or similar obligation or instrument constituting a
security and evidencing indebtedness, and any stock of a class having
priority over any other class as to distribution of assets or payment
of dividends; and "senior security representing indebtedness" means
any senior security other than stock.
Section 18(i) provides:
Except as provided in subsection (a) of this section, or as otherwise
required by law, every share of stock hereafter issued by a registered
management company . . . shall be a voting stock and have equal voting
rights with every other outstanding voting stock: Provided, that this
subsection shall not apply . . . to shares issued in accordance with
any rules, regulations, or orders which the Commission may make
permitting such issue.
The creation of multiple classes of shares may result in shares of a class
having "priority over [another] class as to . . . payment of dividends" and
having unequal voting rights because under the proposed arrangement the holders
of the Class B and Class C shares would bear a proportionately higher share of
each Fund's distribution expenses and transfer agency costs than holders of the
Class A shares and each class would vote separately as a class with respect to
such Fund's Rule 12b-1 distribution plans. In addition, the differing rights
of the three classes of shares as to exchanges and conversion may result in
shares of a class having "priority over [another] class as to distribution of
assets".
The Commission is authorized by Section 6(c) of the Investment Company
Act to exempt, inter alia, any "security, or transaction, or any class or
classes of . . . securities, or transactions", from any provision of the
Investment Company Act or any rule thereunder, "if and to the extent that such
exemption is necessary or appropriate in the public interest and consistent
with the protection of investors and the purposes fairly intended by the policy
and provisions of [the Investment Company Act]".
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<PAGE> 28
In support of the relief requested, the Applicants believe that the
issuance and sale by the Funds of an unlimited number of classes will better
enable the Funds to meet the competitive demands of today's financial services
industry. Under the amended Multiple Pricing System, an investor will be able
to choose the method of purchasing shares that is most beneficial given the
amount of his or her purchase, the length of time the investor expects to hold
his or her shares and other relevant circumstances. The proposed arrangement
would permit the Funds to facilitate both the distribution of their securities
and provide investors with a broader choice as to the method of purchasing
shares without assuming excessive accounting and bookkeeping costs or
unnecessary investment risks. It would also offer investors greater
flexibility in exchanging shares among Funds. The establishment of multiple
shares may attract assets to the Fund to the benefit of the holders of all
classes. In addition, if the Funds were required to organize separate
investment portfolios for each class of shares, management of such new
portfolios might be hampered. For example, unless each new portfolio grew at a
sufficient rate and to a sufficient size, it could be faced with liquidity and
diversification problems that would prevent the portfolio from producing a
favorable return. The risk that the new series would ultimately fail because
of duplicative costs and management problems would not be insignificant in
light of today's extremely competitive environment, in which investors may
choose from a broad array of investment alternatives suited to their needs.
Under the proposal, investors will also be able to benefit from the
additional safety and stability resulting from their ability to invest in
established, sizeable investment portfolios. Moreover, as further discussed
herein, owners of each class of shares may be relieved under the Multiple
Pricing System of a portion of the fixed costs normally associated with
investing in mutual funds since such costs would, potentially, be spread over a
greater number of shares than they would be otherwise. Similarly, the owners
of Class A, Class B and Class C shares in those Funds with management
agreements under which the fee rates decrease as the net assets of the
particular Fund increase(19) could expect to enjoy, under the proposed
arrangement, lower effective management fee rates than they
____________________
(19) American Capital Comstock Fund, Inc., American Capital Corporate Bond
Fund, Inc., American Capital Emerging Growth Fund, Inc., American Capital
Enterprise Fund, Inc., American Capital Equity Income Fund, Inc., American
Capital Federal Mortgage Trust, American Capital Growth and Income Fund, Inc.,
American Capital Government Securities, Inc., American Capital Harbor Fund,
Inc., American Capital High Yield Investments, Inc., American Capital Pace
Fund, Inc., American Capital Reserve Fund, Inc., American Capital Tax-Exempt
Trust, and American Capital Texas Municipal Securities, Inc.
26
<PAGE> 29
would enjoy if the arrangement is not implemented. Therefore, in order to
achieve these potential benefits and obviate the risks associated with the
creation of a separate series for each new class of shares, the Funds
originally proposed to establish, and now propose to amend, the Multiple
Pricing System.
The Applicants believe that the proposed allocation of expenses and
voting rights relating to the Rule 12b-1 plans in the manner described above is
equitable and would not discriminate against any group of shareholders. With
respect to any Fund, the rights and privileges of each class of shares are
substantially identical, the possibility that their interests would ever
conflict would be remote and, in any event, the interests of the Class A, Class
B and Class C shareholders with respect to the Rule 12b-1 Fee would be
adequately protected since the Rule 12b-1 plans for each of those classes will
conform to the requirements of Rule 12b-1, including the requirement that their
implementation and continuance be approved on an annual basis by both the full
Board and the Independent Directors of the Fund.
As noted above, the Class A, Class B and Class C shares of all of the
Funds will bear, pro rata, all of the expenses of the Funds, except that the
holders of Class B and Class C shares will bear a proportionately higher Rule
12b-1 Fee and transfer agency costs than the holders of the Class A shares.
By allowing the Funds in effect to offer an unlimited number of
classes of shares, the Funds (and their shareholders) will save the
organizational and other continuing costs that would be incurred if the Funds
were required to establish a separate investment portfolio in order to offer
Class B and Class C shares subject to a CDSC. Moreover, as discussed above, to
the extent that the Funds are able, through the Multiple Pricing System, as
amended, to maintain and expand their shareholder base, shareholders,
irrespective of class, will benefit to the extent that the Funds' pro rata
operating expenses per share are lower than they would be otherwise.
The Funds are aware of the need for full disclosure of the Multiple
Pricing System in each Fund's prospectus (and to the extent necessary, the
statement of additional information) of the differences between the various
class of shares and the different expenses of each class of shares. Each Fund
will disclose the respective expenses, performance data, distribution
arrangements, services, fees, sales loads, deferred sales loads, and exchange
privileges applicable to each class of shares in every prospectus, regardless
of whether all classes of shares are offered through each prospectus. The
shareholder reports of each Fund will disclose the respective expenses and
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<PAGE> 30
performance data applicable to each class of shares. The shareholder reports
will contain, in the statement of assets and liabilities and statement of
operations, information related to the Fund as a whole generally and not on a
per class basis. Each Fund's per share data, however, will be prepared on a
per class basis with respect to all classes of shares of such Fund. To the
extent any advertisement or sales literature describes the expenses or
performance data applicable to a particular class of shares, it will disclose
the expenses and/or performance data applicable for all classes of shares. The
information provided by Applicants for publication in any newspaper or similar
listing of the Funds' net asset values and public offering prices will
separately present each class of shares.
The abuses that Section 18 of the Investment Company Act is intended
to redress are set forth in Section 1(b) of the Investment Company Act which
declares "that the national public interest and the interest of investors are
adversely affected... (7) when investment companies by excessive borrowing and
the issuance of excessive amounts of senior securities increase unduly the
speculative character of their junior securities; or (8) when investment
companies operate without adequate assets or reserves." The Multiple Pricing
System described in this application does not involve borrowings and will not
affect the Funds' assets or reserves. Nor will the proposed arrangement
increase the speculative character of the shares of the Funds, since all such
shares will participate pro rata in all of each Fund's income and all of each
Fund's expenses (with the exception of the differing Rule 12b-1 Fees and
transfer agency costs).
As noted above, under the Multiple Pricing System mutuality of risk
will be preserved with respect to each class of shares in the Funds. Further,
since each class of shares will be redeemable at all times (subject to the same
limitations set forth in the Fund's prospectus and statement of additional
information), since no class of shares will have any preference or priority
over any other class in each Fund in the usual sense (that is, no class will
have distribution or liquidation preferences with respect to particular assets,
no class will have any right to require that lapsed dividends be paid before
dividends are declared on the other class and no class will be protected by any
reserve or other account), and since the similarities (and, with respect to the
Rule 12b-1 distribution plans and associated voting rights, the conversion
feature, the transfer agency costs, and the exchange privileges,
dissimilarities)
28
<PAGE> 31
of each class of shares will be fully disclosed in each Fund's prospectus and
statement of additional information, investors will not be given misleading
impressions as to the safety or risk of any class of shares and the nature of a
particular class of shares will not be rendered speculative.
Moreover, the Funds' capital structure under the proposed arrangement
will not induce any group of shareholders to invest in risky securities to the
detriment of any other group of shareholders since the investment risks of the
Funds will be borne equally by all of its shareholders. The Funds' capital
structure under the proposed arrangement will not enable insiders to manipulate
the expenses and profits among the various classes of shares since the Funds
are not organized in a pyramid fashion and since all the expenses and profits
of the Funds will be allocated pro rata to each class on the basis of the
relative net asset value of the respective classes, except the disproportionate
Rule 12b-1 Fee under the Rule 12b-1 distribution plans and the incremental
transfer agency costs, which will be borne by Class B and Class C. In
addition, all shareholders will have equal voting rights (except with respect
to matters pertaining to the Class A, Class B and Class C Rule 12b-1
distribution plans). In addition, under the proposed arrangement, the level of
Rule 12b-1 Fee attributable to each class of the Funds will be subject to
annual approval by the Fund's Directors, including the Directors who are not
interested persons of the Funds and have no direct or indirect financial
interest in the operation of the plans.
Similarly, the concerns that complex capital structures may facilitate
control without equity or other investment and may make it difficult for
investors to value the securities of the Funds are not present under the
proposed Multiple Pricing System. With respect to this latter concern, it may
be noted that the Applicants represent herein that they will take appropriate
steps to ensure that the respective yields on the various classes of shares of
the Funds are fairly disclosed in their respective registration statements,
shareholder reports and any advertising materials, including newspaper
advertisements. Also, the Applicants represent herein that the information
provided by the Applicants to any newspaper or similar listing of any Fund's
net asset value and public offering price will separately present each class of
shares.
The classes of securities that were present in the capital structures
that prompted the Commission to recommend the adoption of Section 18 (i.e.,
funded debt, preference stocks and convertible securities) are not present in
the Multiple Pricing System. It should be noted further that the Multiple
Pricing System involves less complex
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<PAGE> 32
capital structures than other kinds of capital structures permitted by the
Commission in the past with respect to open-end management investment companies
(see, for example, the orders entered on exemption applications concerning
so-called dual funds, e.g., Federated Dual-Exchange Fund Incorporated, IC-6319
(January 6, 1971) and IC-6757 (October 1, 1971)).
In August 1988, the Commission issued an order permitting the creation
of separate classes of shares in an analogous situation. See Merrill Lynch
California Municipal Bond Trust, et al., IC-16503 (July 28, 1988) (notice) and
IC-16535 (August 23, 1988) (order). This order (the "Merrill Lynch Funds
Order"), which was obtained by a group of funds sponsored by Merrill Lynch
Funds Distributor, Inc., permits each fund to offer two classes of shares
featuring separate sales arrangements. One class is sold pursuant to a
front-end load without any ongoing distribution fees and the second class is
sold subject to a CDSC and a Rule 12b-1 distribution plan. The classes differ
only in that the class of shares sold subject to the CDSC bears the costs of
the Rule 12b-1 distribution plan and certain incremental transfer agency costs.
The CDSC class of shares has exclusive voting rights with respect to matters
affecting its Rule 12b-1 distribution plan and each class of shares has
different exchange privileges.
Several distinctions exist between the amended Multiple Pricing System
and the dual distribution arrangements approved by the Commission in the
Merrill Lynch Funds Order. First, the Funds propose to offer an unlimited
number of classes, and specifically, a third class of shares - Class C shares.
The Merrill Lynch shares sold subject to a front-end sales load do not bear the
cost of any ongoing distribution fees(20) while the Multiple Pricing System
involves an ongoing Rule 12b-1 Fee in connection with its Front-End Option.
While not present in the Merrill Lynch arrangement, this aspect of the Multiple
Pricing System has been approved by the Commission.(21) In addition, the
Commission has previously granted exemptive relief to another fund group
permitting those funds
____________________
(20) However, Merrill Lynch received amended relief to permit it to impose
a 12b-1 fee on its Class A front-end load shares. See Merrill Lynch Short-Term
Global Income Fund, Investment Company Act Release Nos. 18015 (February 22,
1991) and 18059 (March 22, 1991).
(21) See Prudential-Bache California Municipal Fund, et al., Investment
Company Act Release Nos. 17277 (December 20, 1989) and 17308 (January 18,
1990).
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<PAGE> 33
to offer multiple classes of shares.(22) Finally, the Multiple Pricing System
provides that Class B shares shall convert and Class C shares may convert to
Class A shares a certain number of years after purchase. The multiple
distribution arrangements approved by the Commission in the Merrill Lynch Funds
Order did not have such a conversion feature.
In February 1990, the Commission issued an order permitting the
creation of separate classes of shares in an analogous situation. See Alliance
Short-Term Multi-Market Trust, Inc., et al., IC-17295 (January 8, 1990)(notice)
and IC-17330 (February 2, 1990)(order). This order (the "Alliance Fund
Order"), which was obtained by a fund sponsored by Alliance Fund Distributors,
Inc., permits the fund to offer two classes of shares featuring separate sales
arrangements. One class is sold pursuant to a front-end load without any
ongoing distribution fees and the second class is sold subject to a CDSC and a
Rule 12b-1 distribution plan. The classes differ only in that the class of
shares sold subject to the CDSC bears the costs of the Rule 12b-1 distribution
plan and certain incremental transfer agency costs. The CDSC class of shares
has exclusive voting rights with respect to matters affecting its Rule 12b-1
distribution plan and each class of shares has different exchange privileges.
The Alliance Fund Order provides for the conversion of the Class B shares into
Class A shares a certain number of years after purchase. The Multiple Pricing
System and the dual distribution arrangements approved by the Commission in the
Alliance Fund Order are very similar except that the Funds propose to offer an
unlimited number of classes of shares. Several exemptive orders have been
granted by the Commission, however, authorizing a conversion feature having
characteristics substantially similar to that proposed by the Applicants.(23)
Notwithstanding these differences, Applicants believe that the Multiple Pricing
System is similar in all material respects to the dual distribution
arrangements approved by the Commission in the Merrill Lynch Funds Order and in
the Alliance Fund Order for purposes of determining the merits for granting the
exemptions requested herein.
____________________
(22) See The Horizon Funds, Investment Company Act Release Nos. 17157
(September 29, 1989) and 17226 (November 17, 1989) (three classes); SEI Liquid
Asset Trust, Investment Company Act Release Nos. 17878 (November 27, 1990) and
17915 (December 24, 1990) (five classes); Paine Webber America Fund, et. al.,
Investment Company Act Release Nos. 18084 (April 9, 1991) and 18126 (May 1,
1991).
(23) See The Equitable Funds, Investment Company Act Release Nos. 17506
(May 23, 1990) and 17546 (June 20, 1990); Colonial Value Investing Portfolios,
Investment Company Act Release Nos. 17438 (April 16, 1990) and 17495 (May 16,
1990).
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<PAGE> 34
The Applicants agree that the prospectus and statement of additional
information of the Funds will (i) describe the services rendered and
compensation paid under the Rule 12b-1 distribution plans with respect to each
class and the Rule 12b-1 Fee payable by the Funds for such services; (ii)
disclose all material information concerning each class of shares in a manner
that will enable an investor to make a comparative analysis of such classes and
facilitate the making of an investment decision as to which class would be more
advantageous to the investor; and (iii) include a statement to the effect that
a sales person and any other person entitled to receive any portion of a Rule
12b-1 Fee may receive different compensation for selling one particular class
of shares over another in the same Fund.
The Applicants believe that the Multiple Pricing System, as amended,
will provide a meaningful choice for public investors under all foreseeable
circumstances. An investor's decision to invest in Class A, Class B or Class C
shares at any given time will depend on a number of factors, including the
amount of money to be invested initially and over a period of time, the current
level of front-end sales load or CDSC imposed by the Fund, the period of time
over which the investor proposes to retain his or her investment in the Fund,
the anticipated level of yield from the Class A, Class B and Class C shares,
etc. Because all of these factors vary from time to time and from investor to
investor, it would be misleading as well as impracticable to give examples
illustrating the investor's choice under all circumstances.
The Applicants believe that providing public investors with each of
these three options in the same fund and the same disclosure document better
enables the investor to make the appropriate choice. The Applicants believe
that the public interest in the present matter is no less than the interest
that prompted relief in the Merrill Lynch Funds Order and the Alliance Funds
Order.
VI
RELIEF REQUESTED
The Applicants hereby request an exemptive order pursuant to Section
6(c) of the Investment Company Act to the extent that the proposed issuance and
sale of an unlimited number of classes of shares of the Funds, including the
allocation of voting rights thereto, the payment of dividends thereon and the
conversion feature as described
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<PAGE> 35
above, might be deemed: (1) to result in the issuance of a "senior security
within the meaning of Section 18(g) of the Investment Company Act and to be
prohibited by Section 18(f)(1) of the Investment Company Act; and (2) to
violate the requirement in Section 18(i) of the Investment Company Act that
every share of stock issued by a registered management investment company shall
have equal voting rights with every other outstanding voting stock. The
Applicants agree that the order of the Commission granting the requested relief
shall be subject to the following conditions:
1. Each class of shares will represent interests in the same
portfolio of investments of the Funds, and be identical in all
respects, except as set forth below. The only differences
among various classes of shares of the same Fund will relate
solely to: (a) the impact of the respective Rule 12b-1
distribution plans payments allocated to each class of
shareholders, the incremental transfer agency costs
attributable to the respective classes resulting from the
various distribution alternatives, and any other incremental
expenses that should be properly allocated to one class which
shall be approved by the Commission pursuant to an amended
order, (b) the fact that each class will vote separately as a
class with respect to its particular Fund's Rule 12b-1
distribution plans, except as provided in condition 15, (c)
the different exchange privileges of the various classes of
shares, (d) the fact that each class of shares that is subject
to a Rule 12b-1 fee, other than Class A shares, may have a
conversion feature, and (e) the designation of each class of
shares of the Funds.
2. The Directors of a Fund, including a majority of the
independent Directors, will approve the Multiple Pricing
System. The minutes of the meetings of the Directors of the
Funds regarding the deliberations of the Directors with
respect to the approvals necessary to implement or amend the
Multiple Pricing System will reflect in detail the reasons for
the Directors' determination that the proposed Multiple
Pricing System, or the amendment thereof, is in the best
interests of both the Funds and their respective shareholders.
3. On an ongoing basis, the Directors of the Funds, pursuant to
their fiduciary responsibilities under the Investment Company
Act and otherwise, will monitor the Funds for the existence of
any material conflicts between the interests of the various
classes of shares. The Directors, including
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a majority of the independent Directors, shall take such
action as is reasonably necessary to eliminate any such
conflicts that may develop. The Adviser and the Distributor
will be responsible for reporting any potential or existing
conflicts to the Directors. If a conflict arises, the Adviser
and the Distributor at their own cost will remedy such
conflict up to and including establishing a new registered
management investment company.
4. The Directors of the Funds will receive quarterly and annual
Statements concerning distribution and shareholder servicing
expenditures complying with paragraph (b)(3)(ii) of Rule
12b-1, as it may be amended from time to time. In the
Statements, only distribution expenditures properly
attributable to the sale or servicing of a particular class of
shares will be used to justify the Rule 12b-1 Fee charged to
that class. Expenditures not related to the sale or servicing
of a particular class of shares will not be presented to the
Directors to justify any fee attributable to that class. The
Statements, including the allocations upon which they are
based, will be subject to the review and approval of the
independent Directors in the exercise of their fiduciary
duties.
5. Dividends paid by a Fund with respect to each class of its
shares, to the extent any dividends are paid, will be
calculated in the same manner at the same time on the same day
and will be in the same amount, except that Rule 12b-1 Fee
payments relating to each respective class of shares will be
borne exclusively by that class and any incremental transfer
agency costs relating to a particular class of shares will be
borne exclusively by that class.
6. The methodology and procedures for calculating the net asset
value and dividends and distributions of the various classes
and the proper allocation of income and expenses among such
classes has been reviewed by an expert (the "Expert") who has
rendered a report to Applicants, which has been provided to
the staff of the Commission, that such methodology and
procedures are adequate to ensure that such calculations and
allocations will be made in an appropriate manner. On an
ongoing basis, the Expert, or an appropriate substitute
Expert, will monitor the manner in which the calculations and
allocations are being made and, based upon such review, will
render at least annually a report to the Funds that the
calculations and allocations are being made properly. The
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<PAGE> 37
reports of the Expert shall be filed as part of the periodic
reports filed with the Commission pursuant to Sections 30(a)
and 30(b)(1) of the Investment Company Act. The work papers
of the Expert with respect to such reports, following request
by a Fund (which the Fund agrees to provide), will be
available for inspection by the Commission staff upon the
written request to the Fund for such work papers by a senior
member of the Division of Investment Management, limited to
the Director, an Associate Director and any Regional
Administrators or Associate and Assistant Administrators. The
initial report of the Expert is a "report on policies and
procedures placed in operation" as defined and described in
SAS No. 70 of the AICPA, and the ongoing reports will be
"reports on policies and procedures placed in operation and
test of operating effectiveness," as defined and described in
SAS No. 70 of the AICPA, as it may be amended from time to
time, or in similar auditing standards as may be adopted by
the AICPA from time to time.
7. The Applicants have adequate facilities in place to ensure
implementation of the methodology and procedures for
calculating the net asset value and dividends and
distributions among the various classes of shares and the
proper allocation of income and expenses among such classes of
shares and this representation will be concurred with by the
Expert in the initial report referred to in condition (6)
above and will be concurred with by the Expert, or an
appropriate substitute Expert, on an ongoing basis at least
annually in the ongoing reports referred to in condition (6)
above. Applicants will take immediate corrective measures if
this representation is not concurred in by the Expert or
appropriate substitute Expert.
8. The prospectus of each Fund will contain a statement to the
effect that a salesperson and any other person entitled to
receive compensation for selling or servicing Fund shares may
receive different compensation for selling one particular
class of shares over another in the Fund.
9. The Distributor will adopt compliance standards as to when a
particular class of shares may appropriately be sold to
particular investors. Applicants will require all persons
selling shares of the Funds to agree to conform to such
standards.
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<PAGE> 38
10. The conditions pursuant to which the exemptive order is
granted and the duties and responsibilities of the Directors
of the Funds with respect to the Multiple Pricing System will
be set forth in guidelines which will be furnished to the
Directors.
11. Each Fund will disclose the respective expenses, performance
data, distribution arrangements, services, fees, sales loads,
deferred sales loads, and exchange privileges applicable to
each class of shares in every prospectus, regardless of
whether all classes of shares are offered through each
prospectus. Each Fund will disclose the respective expenses
and performance data applicable to each class of shares in
every shareholder report. The shareholder reports will
contain, in the statement of assets and liabilities and
statement of operations, information related to the Fund as a
whole generally and not on a per class basis. Each Fund's per
share data, however, will be prepared on a per class basis
with respect to all classes of shares of such Fund. To the
extent any advertisement or sales literature describes the
expenses or performance data applicable to a particular class
of shares, it will also disclose the expenses and/or
performance data applicable to all classes of shares. The
information provided by Applicants for publication in any
newspaper or similar listing of the Funds' net asset values
and public offering prices will present each class of shares
separately.
12. The Applicants acknowledge that the grant of the exemptive
order requested by this Application will not imply Commission
approval, authorization or acquiescence in any particular
level of payments that the Funds may make pursuant to their
Rule 12b-1 distribution plans in reliance on the exemptive
order.
13. Any class of shares with a conversion feature ("Purchase
Class") will convert into another class ("Target Class") of
shares on the basis of the relative net asset values of the
two classes, without the imposition of any sales load, fee, or
other charge. After conversion, the converted shares will be
subject to an asset-based sales charge and/or service fee (as
those terms are defined in Article III, Section 26 of the
NASD's Rules of Fair Practice), if any, that in the aggregate
are lower than the asset-based sales charge and service fee to
which they were subject prior to the conversion.
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<PAGE> 39
14. Applicants will comply with the provisions of proposed Rule
6c-10 under the Investment Company Act, Investment Company Act
Release No. 16619 (November 2, 1988) as such rule is currently
proposed and as it may be reproposed, adopted or amended.
15. If a Fund implements any amendment to a Rule 12b-1 plan (or,
if presented to shareholders, adopts or implements any
amendment of a non-Rule 12b-1 shareholder services plan) that
would increase materially the amount that may be borne by the
Target Class shares under the plan, Purchase Class shares will
stop converting into Target Class shares unless shareholders
of the Purchase Class, voting separately as a class, approve
the proposal. The Directors shall take such action as is
necessary to ensure that existing Purchase Class shares are
exchanged or converted into a new class of shares ("New Target
Class"), identical in all material respects to the Target
Class as it existed prior to implementation of the proposal,
no later than the date such shares previously were scheduled
to convert into Target Class shares. If deemed advisable by
the Directors to implement the foregoing, such action may
include the exchange of all existing Purchase Class shares for
a new class ("New Purchase Class"), identical to such existing
Purchase Class shares in all material respects except that the
New Purchase Class will convert into the New Target Class.
The New Target Class and New Purchase Class may be formed
without further exemptive relief. Exchanges or conversions
described in this condition shall be effected in a manner that
the Directors reasonably believe will not be subject to
federal taxation. In accordance with condition 3, any
additional cost associated with the creation, exchange, or
conversion of the New Target Class or New Purchase Class shall
be borne solely by the Adviser and the Distributor. Purchase
Class shares sold after the implementation of the proposal may
convert into Target Class shares subject to the higher maximum
payment, provided that the material features of the Target
Class plan and the relationship of such plan to the Purchase
Class are disclosed in an effective registration statement.
For the reasons set forth above, the Applicants believe that the
relief requested is based upon the legitimate needs of the Funds and
particularly Reserve Fund and their respective shareholders, and will not
adversely affect the
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<PAGE> 40
interests of any shareholders. Further, the Applicants submit that the
requested exemption is appropriate in the public interest and is consistent
with the protection of investors and the purposes fairly intended by the policy
and provisions of the Investment Company Act.
VII
EXEMPTIONS FROM SECTIONS 2(a)(32), 2(a)(35),
22(c) AND 22(d) OF THE INVESTMENT COMPANY
ACT AND RULE 22c-1 THEREUNDER
The Applicants are requesting an exemption from the provisions of
Sections 2(a)(32), 2(a)(35), 22(c) and 22(d) of the Investment Company Act and
Rule 22c-1 thereunder, to the extent necessary to permit the Funds to assess a
CDSC on certain redemptions of an unlimited number of classes of shares of the
Funds, and, as described below, to permit the Funds to waive the CDSC with
respect to certain types of redemptions.
A. Description of CDSC.
As noted herein, the Class A shares of the Funds will be sold subject
to a traditional front-end sales load, which may be $0 as will be the case for
Reserve Fund, and a Rule 12b-1 Fee at a rate of up to .25% per annum of the
average daily net assets of the Class A shares. The Class B and Class C shares
will be subject to deferred charges consisting of a Rule 12b-1 Fee at a rate of
up to 1% per annum of the average daily net assets of the respective class of
shares and a CDSC. In addition, Class C shares may be sold with a front-end
sales load. The Class B and Class C Rule 12b-1 Fee and the CDSC will be paid
to the Distributor to defray the cost of paying sales commissions to Service
Organizations on the sale of Class B and Class C shares of the Funds.
The CDSC will not be imposed on redemptions of shares which were
purchased more than a fixed number of years prior to their redemption (the
"CDSC Period") or on Class B shares or Class C shares derived from reinvestment
of distributions. Furthermore, no CDSC will be imposed on an amount which
represents an increase in the value of the shareholder's account resulting from
capital appreciation above the amount paid for shares purchased during the CDSC
Period. In determining whether a CDSC is applicable, it will be assumed that a
redemption is made first of any shares in the shareholder's Fund account that
are not subject to a CDSC, second of
38
<PAGE> 41
shares derived from reinvestment of distributions, third of shares held for a
period longer than the CDSC Period, and fourth of shares held for a period not
longer than the CDSC Period.
The CDSC will be assessed on an amount equal to the lesser of the then
current market value or the cost of shares being redeemed.
The amount of the CDSC to be imposed will depend on the number of
years since the investor made the purchase payment from which an amount is
being redeemed and the net asset value of the shares at the time of redemption
as set forth in a Fund's prospectus. For example, if the CDSC is imposed for a
three-year period, the schedule would be as follows:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
Year Since Purchase as a Percentage of Net Asset
Payment Made Value of Shares Redeemed
------------ ------------------------
<S> <C>
First 3.0%
Second 2.0%
Third 1.0%
Fourth None
</TABLE>
This schedule is only an example of a CDSC schedule. The CDSC of the Funds may
be higher or lower than that set forth in this example. It is expected that
the CDSC schedule and CDSC Period of the Funds will depend in part on the
front-end sales loads on the Class A shares of the Funds and the compensation
paid to financial intermediaries for selling shares of the Funds.
The following examples illustrate the operation of the CDSC as it
relates to the schedule above:
Assume that an investor invested $1,000 in the Class B shares of a
Fund and 2-1/2 years later the value of such shareholder's account (including
additional shares credited to the shareholder's account through the Fund's
automatic reinvestment program) had grown to $1,200. If the shareholder
redeemed Class B shares worth $200 or less, no CDSC at all would be charged.
If the shareholder, however, redeemed all $1,200 worth of Class B shares at
that time, the CDSC would be charged on $1,000. Since the redemption would
have been made in the third year after the purchase (i.e., the investor has
owned the shares for 2-1/2 years), the CDSC would be imposed at the rate of
1.0% and would be in the amount of $10.00.
As another example, assume that an investor invested $10,000 in the
Class B shares of a Fund and 3-1/2 years later, despite the fact that
distributions reinvested in the Fund during that time period had a current
value of
39
<PAGE> 42
$2,000, the value of the account including such distributions had declined to
$9,000. If the investor redeemed up to $2,000 no CDSC would be imposed since
the amount of the redemption would be deemed to be derived from reinvestment of
distributions. Any redemption exceeding $2,000, however, would result in the
imposition of a CDSC, on that amount in excess of $2,000. However, in this
scenario, there would be no CDSC imposed because the three year period had
expired.
In determining the rate of any applicable CDSC, it will be assumed that
a redemption is made of Class B shares or Class C shares held by the investor
for the longest period of the time within the CDSC Period.
B. Exercise of Exchange Privilege.
The CDSC will not be imposed in connection with the exercise of an
exchange privilege whereby an investor exchanges Class B or Class C shares of a
Fund for Class B or Class C shares of another Fund. In the case of the
exercise of an exchange privilege between the Funds, a Fund will "tack" the
period for which the original shares of a class of the Fund were held on to the
holding period of the shares acquired in the exchange for purposes of
determining what, if any, CDSC is applicable in the event that such acquired
shares are redeemed following the exchange. Furthermore, in the event of
redemptions of shares after exchanges, an investor will be subject to the CDSC
schedule of the original fund.
C. Waiver or Reduction of CDSC.
In addition, as discussed below, Applicants request relief to permit
each Fund to waive or reduce the CDSC in certain circumstances. Any waiver
will comply with the conditions in paragraphs (a) through (d) of Rule 22d-1 of
the Investment Company Act.
D. Exemption Requested.
The Applicants believe that arguments can be made that the proposed
CDSC on the Class B and Class C shares of the Funds is consistent with all
provisions of the Investment Company Act and that no exemptive relief would be
required in order to implement the proposed transactions. However, to avoid
any possibility that questions may be raised as to the potential applicability
of various definitional and regulatory sections of the Investment
40
<PAGE> 43
Company Act, the Applicants, pursuant to Section 6(c) of the Investment Company
Act, hereby request an exemptive order of the Commission in connection with the
offering of the Class B and Class C shares of the Funds, as amended, to the
extent necessary, from the provisions of the Investment Company Act detailed
below.
Section 2(a)(32) of the Investment Company Act defines a "redeemable
security" as "any security, other than short-term paper, under the terms of
which the holder, upon its presentation to the issuer or to a person designed
by the issuer, is entitled...to receive approximately his proportionate share
of the issuer's current net assets, or the cash equivalent thereof." Section
5(a)(1) of the Investment Company Act defines an "open-end company" as "a
management company which is offering for sale or has outstanding any redeemable
security of which it is the issuer."
Section 2(a)(35) of the Investment Company Act, in pertinent part,
defines "sales load" as "...the difference between the price of a security to
the public and that portion of the proceeds from its sale which is received and
invested or held for investment by the issuer...."
Section 22(c) of the Investment Company Act empowers the Commission to
"...make rules and regulations applicable to registered investment companies
and to principal underwriters of, and dealers in, the redeemable securities of
any registered investment company...." Rule 22c-1 thereunder, in pertinent
part, prohibits a registered investment company issuing a redeemable security
from selling, redeeming or repurchasing any such security except at a price
based on the current net asset value of such security.
Section 22(d) of the Investment Company Act provides, in pertinent
part, that "[n]o registered investment company shall sell any redeemable
security issued by it to any person except either to or through a principal
underwriter for distribution...and...no principal underwriter of such security
and no dealer shall sell any such security to any person except a dealer, a
principal underwriter or the issuer, except at a current offering price
described in the prospectus."
The Applicants believe that the imposition of the CDSC in the manner
described above would not cause shares of the Funds to fall outside the
definition of "redeemable security" in Section 2(a)(32) of the Investment
Company Act, and the Applicants believe, therefore, that the Funds qualify as
open-end investment companies under Section 5(a)(1) of the Investment Company
Act. The CDSC in no way restricts a shareholder from receiving his
proportionate share of the current net assets of a Fund, but merely defers the
deduction of a sales charge and makes
41
<PAGE> 44
it contingent upon an event which may never occur. Moreover, while the CDSC is
not a redemption charge in the ordinary sense, it is relevant to note that the
conditions of Section 10(d) of the Investment Company Act contemplate that an
investment company may both be an open-end company (subparagraph (1)) and
impose a discount from net asset value on redemption of its shares
(subparagraph (4)).
Nevertheless, the Applicants recognize that there may be some
disagreement with their interpretation of Section 2(a)(32). In order to avoid
uncertainty as to the Funds' status as open-end companies, the Applicants
request an exemption from the operation of Section 2(a)(32) of the Investment
Company Act to the extent necessary to permit implementation of the proposed
CDSC in connection with the Funds.
Similarly, the Applicants believe that the proposed CDSC qualifies as a
"sales load" within the meaning of Section 2(a)(35). A CDSC is functionally a
sales charge because it is paid to the Distributor to reimburse it for expenses
related to offering Class B and Class C shares of the Funds for sale to the
public. Although mutual funds sold with a sales charge traditionally impose
such charge at the time of purchase, as in the case of the Class A shares,
there is no reason to prohibit imposition of a sales charge at another time.
In fact, it would seem that policy considerations would permit the CDSC to be
levied in the manner proposed. The contingent nature of the proposed charge
makes the purchaser better off than if a sales load were imposed at the time of
sale, since in the case of the CDSC the shareholder enjoys the possibility that
he will have to pay only a reduced sales charge, or no sales charge at all.
Also, because the CDSC will never be imposed on an amount in excess of the
market value of the shares being redeemed, an investor whose account declines
in value may ultimately pay a lower sales charge than if a conventional sales
charge were imposed at the time of purchase. The deferral of the sales charge,
and its contingency upon the occurrence of an event which might not occur, does
not change the basic nature of this charge, which is in every other respect a
sales charge. Nevertheless, in view of the possibility that Section 2(a)(35)
might be construed to apply only to sales loads charged at the time of
purchase, Applicants request an exemption from the provisions of Section
2(a)(35), to the extent necessary to implement the proposed charge in
connection with the Class B and Class C shares of the Funds.
The Applicants also believe that implementation of the proposed CDSC is
not violative of Section 22(c) or Rule 22c-1 thereunder. When a redemption of
a Fund's shares is effected, the price of the shares on redemption will
42
<PAGE> 45
be based on current net asset value. The CDSC will merely be deducted at the
time of redemption in arriving at the shareholder's proportionate redemption
proceeds. However, in order to avoid any possibility that questions might be
raised as to the Funds' compliance with Section 22(c) and Rule 22c-1, the
Applicants request an exemption from the operation of the provisions of Rule
22c-1 to the extent necessary or appropriate to permit the Funds to implement
the proposed CDSC.
Rule 22d-1, in substance, permits variation or elimination of sales
loads to "particular classes of investors or transactions," provided that such
variation or elimination is described in the investment company's registration
statement. Because the CDSC and the waivers therefrom, as amended, will be
applied as described in each Fund's registration statement, the Applicants
believe that Rule 22d-1 exempts the CDSC and the waivers therefrom from the
prohibitions of Section 22(d) of the Investment Company Act. Nonetheless, to
preclude any assertion that Rule 22d-1 is inapplicable to the CDSC, the
Applicants request an exemption from Section 22(d) to the extent necessary or
appropriate to implement the CDSC and waivers therefrom as described above.
The Applicants believe that such an order would, in all events, be consistent
with the policies embodied in Rule 22d-1, since the Funds intend to disclose
fully those charges and the waivers in their respective prospectus.
E. Statement in Support of Exemption.
Section 6(c) of the Investment Company Act provides in part that the
Commission, by order upon application, may conditionally or unconditionally
exempt any person, security or transaction, or any class or classes of persons,
securities or transactions from any provision of the Investment Company Act, if
and to the extent that such exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the Investment Company Act.
The Applicants submit that its request for the exemptive relief set forth above
is consistent with this standard.
The Applicants believe that the imposition of the CDSC on the Class B
shares and Class C shares of the Funds is fair and in the best interests of its
shareholders. The CDSC described above is fair to Class B and Class C
shareholders because it applies only to amounts representing purchase payments
and does not apply to amounts
43
<PAGE> 46
representing increases in the value of an investor's account through capital
appreciation, or to amounts representing reinvestment of distributions.
Moreover, the imposition of the CDSC under the circumstances described
above is appropriate in light of the relationship between the CDSC and the
Fund's Rule 12b-1 distribution plans. As noted above, the Funds finance the
distribution expenses of Class B shares pursuant to its Class B Plan and the
CDSC and finance the distribution expenses of Class C shares pursuant to its
Class C Plan and CDSC. Under the Class B and Class C Plans, the Funds will pay
a distribution fee to the Distributor as reimbursement for expenses related to
the offering of the Class B and Class C shares. These expenses include but are
not limited to one or more of the following: the payment of sales commissions,
including distribution fee payments, advertising and promotional costs,
including the cost of distributing materials to shareholders, and the costs of
printing and distributing the Fund's prospectus and statement of additional
information to prospective investors. Each Class B and Class C Plan expenses
will be calculated on the basis of a percentage of the average daily net assets
of the Class B and Class C shares (at an annual rate of up to 1%). Each Fund
will expense all charges made under the Rule 12b-1 distribution plans.
Proceeds from the CDSC will be paid to the Distributor and also will be used by
the Distributor to defray the cost of paying sales commissions to dealers in
the sale of Class B shares and Class C shares of the Funds.
The Applicants believe that where amounts attributable to Class B and
Class C shares purchased less than a fixed number of years prior to redemption
(or such other period depending on a Fund's CDSC schedule) are redeemed (and
thus no longer contribute to the annual Rule 12b-1 Fee) it is fair (1) to
impose on the withdrawing Class B and Class C shareholder a lump sum payment
reflecting expenses which have not been recovered through payments by the Fund
and (2) to remove the Class B and Class C assets on which the CDSC was imposed
from the base amount on which the Fund's Class B and Class C Rule 12b-1 Fee is
calculated. The amount, computation and timing of the CDSC thus are designed
to promote fair treatment of all Class B and Class C shareholders, while
permitting a Fund to offer investors the advantage of having purchase payments
fully invested on their behalf immediately. In their review of the Rule 12b-1
distribution plans, the Directors of the Funds will take into account the use
by the Distributor of revenues raised by the CDSC. Waiver of the CDSC in
accordance with the conditions
44
<PAGE> 47
contained herein will not harm the Funds or its remaining Class A, Class B or
Class C shareholders or unfairly discriminate among shareholders or purchases.
VIII
RELIEF REQUESTED
For the reasons set forth above, the Applicants believe that
implementation of the CDSC in the manner and under the circumstances described
above would be fair and in the best interests of shareholders of the Funds.
Thus, the granting of the order requested herein would be appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Investment Company
Act.
Therefore, for the reasons set forth herein, the Applicants request
that the Commission issue an order pursuant to Section 6(c) of the Investment
Company Act exempting the Funds from the provisions of Sections 2(a)(32),
2(a)(35), 22(c) and 22(d) of the Investment Company Act and Rule 22c-1
thereunder. In addition, Applicant's represent that the exchange privilege of
the various classes of shares of the Funds will comply with the provisions of
Rule 11a-3 under the Investment Company Act.
45
<PAGE> 48
IX
ADDITIONAL INFORMATION
Attached hereto as Exhibit D is a proposed notice of the proceeding
initiated by this Application.
American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
Van Kampen American Capital Asset Management, Inc.
By: /s/ Nori L. Gabert
Nori L. Gabert
Van Kampen American Capital Distributors, Inc.
By: /s/ Scott E. Martin
Scott E. Martin
Dated: January 25, 1995
<PAGE> 49
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Comstock Fund, Inc. declares
that this Application is signed by Nori L. Gabert, Vice President and Secretary
of said Fund, pursuant to the general authority vested in her as such by its
Articles of Incorporation, by its By-Laws and by the resolution of the Board of
Directors dated June 9, 1994.
AMERICAN CAPITAL COMSTOCK FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Comstock Fund, Inc.; that she is Vice President and Secretary
of such Fund; and that all action by bodies necessary to authorize deponent to
execute and file such instrument has been taken. Deponent further says that
she is familiar with such instrument and the contents thereof, and that the
facts therein set forth are true to the best of her knowledge, information and
belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 50
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Corporate Bond Fund, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Corporate Bond Fund, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 51
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Emerging Growth Fund, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL EMERGING GROWTH FUND,
INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Emerging Growth Fund, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 52
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Enterprise Fund, Inc. declares
that this Application is signed by Nori L. Gabert, Vice President and Secretary
of said Fund, pursuant to the general authority vested in her as such by its
Articles of Incorporation, by its By-Laws and by the resolution of the Board of
Directors dated June 9, 1994.
AMERICAN CAPITAL ENTERPRISE FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Enterprise Fund, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 53
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Equity Income Fund, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL EQUITY INCOME FUND,
INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Equity Income Fund, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 54
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Federal Mortgage Trust
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Agreement and Declaration of Trust, by its By-Laws and by the resolution
of the Board of Trustees dated June 9, 1994.
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Federal Mortgage Trust; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 55
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Global Managed Assets Fund
Inc. declares that this Application is signed by Nori L. Gabert, Vice President
and Secretary of said Fund, pursuant to the general authority vested in her as
such by its Articles of Incorporation, by its By-Laws and by the resolution of
the Board of Directors dated June 9, 1994.
AMERICAN CAPITAL GLOBAL MANAGED ASSETS
FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Global Managed Assets Fund Inc.; that she is Vice President
and Secretary of such Fund; and that all action by bodies necessary to
authorize deponent to execute and file such instrument has been taken.
Deponent further says that she is familiar with such instrument and the
contents thereof, and that the facts therein set forth are true to the best of
her knowledge, information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 56
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Government Securities, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL GOVERNMENT SECURITIES,
INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Government Securities, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 57
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Growth and Income Fund, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL GROWTH AND INCOME FUND,
INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Growth and Income Fund, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 58
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Harbor Fund declares that this
Application is signed by Nori L. Gabert, Vice President and Secretary of said
Fund, pursuant to the general authority vested in her as such by its Articles
of Incorporation, by its By-Laws and by the resolution of the Board of
Directors dated June 9, 1994.
AMERICAN CAPITAL HARBOR FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Harbor Fund, Inc.; that she is Vice President and Secretary of
such Fund; and that all action by bodies necessary to authorize deponent to
execute and file such instrument has been taken. Deponent further says that
she is familiar with such instrument and the contents thereof, and that the
facts therein set forth are true to the best of her knowledge, information and
belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 59
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital High Yield Investments, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL HIGH YIELD INVESTMENTS,
INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital High Yield Investments, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 60
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Municipal Bond Fund, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Municipal Bond Fund, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 61
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Pace Fund, Inc. declares that
this Application is signed by Nori L. Gabert, Vice President and Secretary of
said Fund, pursuant to the general authority vested in her as such by its
Articles of Incorporation, by its By-Laws and by the resolution of the Board of
Directors dated June 9, 1994.
AMERICAN CAPITAL PACE FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Pace Fund, Inc.; that she is Vice President and Secretary of
such Fund; and that all action by bodies necessary to authorize deponent to
execute and file such instrument has been taken. Deponent further says that
she is familiar with such instrument and the contents thereof, and that the
facts therein set forth are true to the best of her knowledge, information and
belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 62
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Real Estate Securities Fund,
Inc. declares that this Application is signed by Nori L. Gabert, Vice President
and Secretary of said Fund, pursuant to the general authority vested in her as
such by its Articles of Incorporation, by its By-Laws and by the resolution of
the Board of Directors dated June 9, 1994.
AMERICAN CAPITAL REAL ESTATE SECURITIES
FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Real Estate Securities Fund, Inc.; that she is Vice President
and Secretary of such Fund; and that all action by bodies necessary to
authorize deponent to execute and file such instrument has been taken.
Deponent further says that she is familiar with such instrument and the
contents thereof, and that the facts therein set forth are true to the best of
her knowledge, information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 63
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Reserve Fund, Inc. declares
that this Application is signed by Nori L. Gabert, Vice President and Secretary
of said Fund, pursuant to the general authority vested in her as such by its
Articles of Incorporation, by its By-Laws and by the resolution of the Board of
Directors dated June 9, 1994.
AMERICAN CAPITAL RESERVE FUND,
INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Reserve Fund, Inc.; that she is Vice President and Secretary
of such Fund; and that all action by bodies necessary to authorize deponent to
execute and file such instrument has been taken. Deponent further says that
she is familiar with such instrument and the contents thereof, and that the
facts therein set forth are true to the best of her knowledge, information and
belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 64
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Tax- Exempt Trust declares
that this Application is signed by Nori L. Gabert, Vice President and Secretary
of said Fund, pursuant to the general authority vested in her as such by its
Agreement and Declaration of Trust, by its By-Laws and by the resolution of the
Board of Trustees dated June 9, 1994.
AMERICAN CAPITAL TAX-EXEMPT TRUST
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Tax-Exempt Trust; that she is Vice President and Secretary of
such Fund; and that all action by bodies necessary to authorize deponent to
execute and file such instrument has been taken. Deponent further says that
she is familiar with such instrument and the contents thereof, and that the
facts therein set forth are true to the best of her knowledge, information and
belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 65
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Texas Municipal Securities,
Inc. declares that this Application is signed by Nori L. Gabert, Vice President
and Secretary of said Fund, pursuant to the general authority vested in her as
such by its Articles of Incorporation, by its By-Laws and by the resolution of
the Board of Directors dated June 9, 1994.
AMERICAN CAPITAL TEXAS MUNICIPAL
SECURITIES, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Texas Municipal Securities, Inc.; that she is Vice President
and Secretary of such Fund; and that all action by bodies necessary to
authorize deponent to execute and file such instrument has been taken.
Deponent further says that she is familiar with such instrument and the
contents thereof, and that the facts therein set forth are true to the best of
her knowledge, information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 66
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital U.S. Government Trust for
Income declares that this Application is signed by Nori L. Gabert, Vice
President and Secretary of said Fund, pursuant to the general authority vested
in her as such by its Agreement and Declaration of Trust, by its By-Laws and by
the resolution of the Board of Directors dated June 9, 1994.
AMERICAN CAPITAL U.S. GOVERNMENT
TRUST FOR INCOME
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital U.S. Government Trust for Income; that she is Vice President
and Secretary of such Fund; and that all action by bodies necessary to
authorize deponent to execute and file such instrument has been taken.
Deponent further says that she is familiar with such instrument and the
contents thereof, and that the facts therein set forth are true to the best of
her knowledge, information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 67
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital Utilities Income Fund, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital Utilities Income Fund, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 68
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, American Capital World Portfolio Series, Inc.
declares that this Application is signed by Nori L. Gabert, Vice President and
Secretary of said Fund, pursuant to the general authority vested in her as such
by its Articles of Incorporation, by its By-Laws and by the resolution of the
Board of Directors dated June 9, 1994.
AMERICAN CAPITAL WORLD PORTFOLIO SERIES, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached application dated January 25, 1995 for and on behalf of
American Capital World Portfolio Series, Inc.; that she is Vice President and
Secretary of such Fund; and that all action by bodies necessary to authorize
deponent to execute and file such instrument has been taken. Deponent further
says that she is familiar with such instrument and the contents thereof, and
that the facts therein set forth are true to the best of her knowledge,
information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 69
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, Van Kampen American Capital Distributors, Inc.
declares that this Application is signed by Scott E. Martin, First Vice
President of said Company, pursuant to the general authority vested in him as
such officer.
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By /s/ Scott E. Martin
Scott E. Martin
__________________________
Dated: January 25, 1995
STATE OF ILLINOIS )
: ss.:
COUNTY OF COOK )
The undersigned, being duly sworn, deposes and says that he has duly
executed the attached application dated January 25, 1995 for and on behalf of
Van Kampen American Capital Distributors, Inc.; that he is First Vice President
of such Company; and that all action by bodies necessary to authorize deponent
to execute and file such instrument has been taken. Deponent further says that
he is familiar with such instrument and the contents thereof, and that the
facts therein set forth are true to the best of his knowledge, information and
belief.
/s/ Scott E. Martin
Scott E. Martin
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ Sue Ann Beardsley
Sue Ann Beardsley
<PAGE> 70
Pursuant to Rule 0-2 of the General Rules and Regulations under the
Investment Company Act of 1940, Van Kampen American Capital Asset Management,
Inc. declares that this Application is signed by Nori L. Gabert, Vice
President and Secretary of said corporation, pursuant to the general authority
vested in her as such officer.
VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC.
By /s/ Nori L. Gabert
Nori L. Gabert
Vice President and Secretary
Houston, Texas
Dated: January 25, 1995
STATE OF TEXAS )
: ss.:
COUNTY OF HARRIS )
The undersigned, being duly sworn, deposes and says that she has duly
executed the attached Application dated January 25, 1995, for and on behalf of
Van Kampen American Capital Asset Management, Inc., that she is Vice President
and Secretary of such corporation; and that all action by bodies necessary to
authorize deponent to execute and file such instrument has been taken.
Deponent further says that she is familiar with such instrument and the
contents thereof, and that the facts therein set forth are true to the best of
her knowledge, information and belief.
/s/ Nori L. Gabert
Nori L. Gabert
Subscribed and sworn to before
me a Notary Public this
25th day of January, 1995.
/s/ JoAnn Jaehne
JoAnn Jaehne
<PAGE> 71
Exhibit A
Investment Objectives of Funds
American Capital Comstock Fund, Inc.
Seeks capital growth and income.
American Capital Corporate Bond Fund, Inc.
Seeks current income with conservation of capital.
American Capital Emerging Growth Fund, Inc.
Seeks capital appreciation.
American Capital Enterprise Fund, Inc.
Seeks capital appreciation.
American Capital Equity Income Fund, Inc.
Seeks highest possible income consistent with safety of principal.
American Capital Federal Mortgage Trust
Seeks high current return and relative safety of capital.
American Capital Global Managed Assets Fund, Inc.
Seeks total return.
American Capital Government Securities, Inc.
Seeks high current income.
American Capital Growth and Income Fund, Inc.
Seeks income and long-term growth of capital.
A-1
<PAGE> 72
American Capital Harbor Fund, Inc.
Seeks current income, capital appreciation and conservation of capital.
American Capital High Yield Investments, Inc.
Seeks to maximize current income.
American Capital Municipal Bond Fund, Inc.
Seeks interest income exempt from federal income tax.
American Capital Pace Fund, Inc.
Seeks capital growth.
American Capital Real Estate Securities Fund, Inc.
Seeks long-term growth of capital.
American Capital Reserve Fund, Inc.
Seeks protection of capital and high current income.
American Capital Tax-Exempt Trust (Series Fund)
High Yield Municipal Portfolio
Insured Municipal Portfolio
Seeks as high a level of interest income exempt from federal income tax as is
consistent with the investment policies of each Portfolio.
American Capital Texas Municipal Securities, Inc.
Seeks as high a level of interest income exempt from federal income tax and
Texas state income tax, if any, as is consistent with the Fund's investment
policies.
American Capital U.S. Government Trust for Income
Seeks a high level of current income.
A-2
<PAGE> 73
American Capital Utilities Income Fund, Inc.
Seeks current income.
American Capital World Portfolio Series, Inc. (Series Fund)
American Capital Global Equity Fund - seeks long term growth of capital.
American Capital Global Government Securities Fund - seeks a high level of
current income.
A-3
<PAGE> 74
Exhibit B
Net Assets of Funds
<TABLE>
<CAPTION>
Net Assets at
September 30, 1994
Fund (in millions)
- - ---- ----------------
<S> <C>
American Capital Comstock Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 923,238,411
American Capital Corporate Bond Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . 171,300,984
American Capital Emerging Growth Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . 957,309,152
American Capital Enterprise Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 849,565,759
American Capital Equity Income Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 485,817,882
American Capital Federal Mortgage Trust . . . . . . . . . . . . . . . . . . . . . . . . . 77,061,310
American Capital Global Managed Assets Fund, Inc. . . . . . . . . . . . . . . . . . . . . 18,667,084
American Capital Government Securities, Inc. . . . . . . . . . . . . . . . . . . . . . 3,059,161,858
American Capital Growth and Income Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . 231,740,680
American Capital Harbor Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 467,518,274
American Capital High Yield Investments, Inc. . . . . . . . . . . . . . . . . . . . . . . 442,465,019
American Capital Municipal Bond Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . 353,341,723
American Capital Pace Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,185,681,417
American Capital Real Estate Securities Fund, Inc. . . . . . . . . . . . . . . . . . . . 11,438,028
American Capital Reserve Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 472,426,074
American Capital Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699,685,261
American Capital Texas Municipal Securities, Inc. . . . . . . . . . . . . . . . . . . . . 22,568,996
American Capital U.S. Government Trust for Income . . . . . . . . . . . . . . . . . . . . 339,245,249
American Capital Utilities Income Fund, Inc. . . . . . . . . . . . . . . . . . . . . . . 19,635,648
American Capital World Portfolio Series, Inc.
American Capital Global Equity Fund . . . . . . . . . . . . . . . . . . . . . . 114,548,822
American Capital Global Government Securities Fund . . . . . . . . . . . . . . . 216,565,768
</TABLE>
<PAGE> 75
Exhibit C
AMERICAN CAPITAL MUTUAL FUNDS
MULTIPLE CLASS FUNDS
SECTION I
Description of the Alternate Purchase Plans
Mutual Funds that adopt a multiple class of share structure are required to
maintain records that account for each class of shares of the fund. Shares
which are subject to contingent deferred sales load (CDSL) versus paying only a
front-end sales load (FESL) are charged with a higher distribution fee (12b-1
fee) on a daily basis. Since the 12b-1 fees charged will be higher for CDSL
shares and multiple classes of shares exist, separate Net Asset Values (NAV)
and dividend/distributions must be calculated for each class of shares.
NAV Calculation
Income: Income of the Fund (all classes combined) will be allocated to the
individual classes based on the relative adjusted net assets of each class or
the relative value of adjusted dividend qualifying shares of each class (the
net assets at the beginning of the day after reflecting the prior day's capital
share transactions) as appropriate, depending on the type of fund.
Expenses: Expenses of the Fund not specific to one or more classes will be
allocated to all classes based on the adjusted net assets of each class or the
relative value of adjusted dividend qualifying shares of each class. Expenses
attributable to a particular class will be charged only to that class. Expenses
attributable to a particular class may include the following:
- - - Rule 12b-1 fees
- - - Transfer agent cost
Unrealized Appreciation/Depreciation and Realized Gains/Losses
The change in the market value of investments will be allocated each day based
on the relative adjusted net assets of each class or the relative value of
adjusted dividend qualifying shares of each class as appropriate, depending on
the type of fund. Realized gains and losses will be allocated to the classes on
the same basis.
Dividend/Distributions Paid to Shareholders
The amount of dividends and distribution of gains paid to shareholders of each
class will be determined by the dividend/distribution calculation methodology
described below. The actual amounts paid to each class will be used to
calculate the net asset value of each class.
C-1
<PAGE> 76
Pricing Worksheet
The Multiple Shares NAV Worksheet (Exhibit III) will be used in the daily net
asset value calculation. Utilizing data reviewed by the fund accountant, the
computer system generates the above worksheet for the total fund and each
respective class.
For non-daily dividend funds, the class allocation is based on the relative
adjusted net assets of each class. The allocation is derived by taking prior
day's net assets plus the actual dollars booked from prior day capital stock
activity for each class compared to the total fund. For daily dividend funds,
the class allocation is based on the relative value of adjusted dividend
qualifying shares of each class. The allocation is derived by using dividend
shares times prior day's NAV compared to the fund total.
This class allocation is used to allocate income, non-class-specific expenses,
and realized and unrealized gains and losses. Class specific expenses and
dividend/distributions are applied to the appropriate class. This determines
the net assets for the current day which is divided by outstanding shares for
the NAV per share for each class.
Dividend/Distributions Calculation Methodology
The amount available for dividends, or the projected amount available, will be
based on the combined undistributed net investment income of the Fund. The per
share dividend rates for each class will differ by approximately the expense
rate differential, based on average daily NAV, between the classes of shares
for the applicable period, i.e. daily, monthly, etc.
The maximum distribution rate per share for net realized gains will be
determined by dividing the total fund shares outstanding on the ex-dividend
date into the undistributed net realized gains of the fund (all classes
combined) for the applicable period.
SECTION II
Specified Control Objectives
The following are the specific control objectives of the system of internal
accounting control relating to the allocation of income and expenses and the
calculation of net asset values and dividend distribution amounts for the
multiple classes of shares contemplated above:
1. That the expenses attributable to a particular class are properly
recorded for that class.
2. That income, other operating expenses, and realized and unrealized gains
and losses are allocated properly to each class as described in Section
I.
3. That capital share transactions, including dividends and distributions,
are properly allocated as described in Section I.
4. That net asset value is properly calculated as described in Section I.
C-2
<PAGE> 77
SECTION III
Policies and Procedures to Achieve Specified Control Objectives
The following procedures are designed to account for the various classes of
shares in each fund. From time to time, policies and procedures may be revised
to improve or enhance operations and maintain adherence to specified control
objectives.
1. On a daily basis, the fund accountant completes the "Daily Net Asset
Reconciliation and NAV Proof" (proof sheet) on Exhibit II.
2. Using the proof sheet, the fund accountant reviews the allocation of daily
income and expenses and realized and unrealized gains and losses of each
class.
3. The fund accountant verifies the shares outstanding on the proof sheet to
the amounts supplied by the Transfer Agent.
4. On a daily basis, the fund supervisor reviews the allocations and the net
asset value calculation. On a test basis, the supervisor verifies the
amounts entered by the fund accountant on the proof sheet by agreeing the
amounts entered to source documents and reviewing for reasonableness.
The supervisor initials the worksheet to evidence this review.
5. On a monthly basis, the fund supervisor reviews the monthly financial
statement including the calculations of all income and expense items.
6. For periodic distributions (monthly, quarterly or annually, as
applicable), the calculation is performed by the fund accountant according
to the methodology described in Section 1. The calculation is verified by
a supervisor's initials on the calculation.
SECTION IV
Financial Statement Disclosure for Funds with Multiple Classes of Shares
Portfolio of Investments
- - - Will be shown in accordance with standard reporting practices.
Statement of Assets and Liabilities
- - - Assets and liabilities will be disclosed on a combined basis.
- - - Net asset value and offering price per share data will be presented for
each class.
- - - The composition of net assets (Summary of Shareholders Equity) will be
presented on a combined basis, but will include a description of each
class (par, outstanding shares, etc.).
Statement of Operations
- - - A standard reporting format will be used.
C-3
<PAGE> 78
Statement of Changes in Net Assets
A standard reporting format will be used with separate disclosure of
dividends and capital gain distributions to shareholders and dollar value
of capital share transactions for each class.
Financial Highlights
A standard reporting format will be used and the per share data and
ratios will be shown for each class (portfolio turnover which will be
shown in total).
Notes to Financial Statements
The notes to the finanical statements will include the following additional
disclosures in the footnotes:
- - - Description of each class of shares and the related class-specific
expenses.
- - - Information on the 12b-1 fee arrangements for each class.
- - - Capital shares transactions for each class for the most recent period and
the prior year.
C-4
<PAGE> 79
Exhibit II
DAILY NET ASSET RECONCILIATION AND NAV PROOF Page 1
FUND_________________ DATE_________________
DAILY NAV PROOF
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Line Activity CLASS A CLASS B CLASS C TOTAL FUND
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current Shares Outstanding
- - -------------------------- ---------------- ---------------- ----------------- ----------------
1 Prior Day's NAV (4 decimals)
---------------- ---------------- ----------------- ----------------
PER SHARE IMPACT ON NAV
CAPITAL SHARE TRANSACTIONS
2 Capital Share Transactions
from Page 31 ================ ================ ================= ================
NET INVESTMENT INCOME
3 Today's Net Investment Income* $ $ $
*(from R707 Cost-P) ---------------- ---------------- -----------------
4 Net Investment Income
================ ================ ================= ================
EX-DIVIDEND/DISTRIBUTION
5 Income Dividend (from page 3) ( ) ( ) ( ) ( )
================ ================ ================= ================
Capital Gain Distribution per class ( ) ( ) ( ) ( )
================ ================ ================= ================
MARKET VALUE ACTION
7 Per Class Allocation
(9 DECIMALS FROM R707) ---------------- ---------------- -----------------
8 Total Impact (line 23 x line 7) $ $ $
---------------- ---------------- -----------------
9 Per Share Effect of Market change
================ ================ ================= ================
10 Calculated Price Per Share
(SUM OF LINES 1,2,4,5,6,&9) ---------------- ---------------- ----------------- ----------------
11 System Generated Price ( ) ( ) ( ) ( )
---------------- ---------------- ----------------- ----------------
12 Difference should not exceed .0002
================ ================ ================= ================
MARKET VALUE ACTION
13 R403 Current Market Value of all investments
-----------------
14 R403 Today's Mark-to-Market on Futures
-----------------
15 P/D R403 Prior Day's Market Value ( )
----------------
16 R314 Today's Discount Earned ( )
----------------
17 R314 Today's Accretion of CID ( )
----------------
18 R314 Today's Amortization of Premium
----------------
19 R309 Investments purchased - at c ( )
----------------
20 R309 Investments sold - at proceeds
----------------
21 R810 P I K/I O Adjustments ( )
----------------
R309 Adjusting Marks on Futures Trades
----------------
Subtotal ( )
-----------------
23 Change in Market Value
=================
</TABLE>
<PAGE> 80
DAILY NET ASSET RECONCILIATION AND NAV PROOF Page 2
FUND_________________ DATE_________________
DAILY NET ASSET RECONCILIATION
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
G/L PRIOR Percent
Line Report Activity ACCT DAY Amount of Change
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DAILY ACCRUALS
INCOME
1 R303 Dividend Income CPO5
----------------- -------------------- ------------
2 R810 Bond Interest Income Non-taxable CP10
----------------- -------------------- ------------
3 R810 Bond Interest Income Taxable CP13
----------------- -------------------- ------------
4 R810 Short-term Interest Income Non-taxable CP16
----------------- -------------------- ------------
5 R810 Short-term Intrerest Income Taxable CP19
----------------- -------------------- ------------
6 R314 Acquisition Discount Earned CP31
----------------- -------------------- ------------
7 R314 Accretion of CID - Taxable CP34
----------------- -------------------- ------------
8 R314 Accretion of CID - Non-taxable CP35
----------------- -------------------- ------------
9 R314 Amortization of Premium - Taxable CP37 ( ) ( )
----------------- -------------------- ------------
10 R314 Amortization of Premium - Non-taxable CP38 ( ) ( )
----------------- -------------------- ------------
11 Other Income CP45
----------------- -------------------- ------------
12 Interim Income Adjustments CP46
----------------- -------------------- ------------
13 GROSS INVESTMENT INCOME
====================
EXPENSES
14 Operating Expense Accrual CP5095 ( )
--------------------
15 12-b1 Expense Accrual CP53/CP4B/CP54C +/-
--------------------
Direct Expense Payments +/-
--------------------
16 NET INVESTMENT INCOME TODAY
====================
To Page 1, Line 3 TF
To Page 2, line 18
NET ASSETS AT COST RECONCILIATION
17 R701 Prior Day's Net Assets at Cost
--------------------
18 Today's Net Investment Income (Line 16, page 2)
--------------------
19 Today's Total Net Share Activity (Line 6, Page 3)
--------------------
20 R302 Today's Net Gain/Loss (exct. Futures)
--------------------
21 R309 Mark-to-Market on Futures
--------------------
22 R810 PIK / IO Adjustments * ( )
-------------------------- --------------------
23 Today's Distributiions (Line 31, page 3 or
amounts from Lines 5 & 6, page 1) ( )
--------------------
24 Below Adjustments *
--------------------
25 R701 TODAY'S NET ASSETS AT COST
====================
(Pre-priced)
* Detail of Adjustments
$
- - ----------------------------------
$
- - ----------------------------------
$
- - ----------------------------------
$
- - ----------------------------------
</TABLE>
<PAGE> 81
DAILY NET ASSET RECONCILIATION AND NAV PROOF Page 3
FUND____________________ DATE__________________
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------
Line Report Activity Amount
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Shares Outstanding
- - --------------------------
CAPITAL SHARE TRANSACTIONS-IMPACT ON NAV
CLASS A CLASS B CLASS C
1 S/R Today's Net Dollars to Fund
-------------- -------------- --------------
2 Est Today's Net Est. Dollars
-------------- -------------- --------------
3 P/D Reverse P/D Net Est. Dollars
-------------- -------------- --------------
4 Reinvestment Dollars to Fund
-------------- -------------- --------------
5 Today's Dollar Impact = = =
-------------- -------------- --------------
6 Today's Total Dollar Impact +A+B+C =
--------------------------- --------------
7 S/R Today's Net Shares to Fund
-------------- -------------- --------------
8 Est. Today's Net Est. Shares
-------------- -------------- --------------
9 P/D Reverse P/D Net Est. Shares
-------------- -------------- --------------
10 Reinvestment Shares to Fund
-------------- -------------- --------------
11 Today's Share Impact per ( = = =
-------------- -------------- --------------
12 Prior Day's NAV x x x
-------------- -------------- --------------
13 = = =
-------------- -------------- --------------
15 Change in Capital Shares (L5-L13) = =
============== ============== ==============
PER SHARE EFFECT **
============== ============== ==============
17 +A+B+C =
--------------
18 ** If answer exceeds +/- .0005 notify supervisor PER SHARE TF
Equalization Factor
-------------- -------------- --------------
CLASS A CLASS B CLASS C
19 S/R Current Shares Outstanding
-------------- -------------- --------------
20 Est. Share Estimates - Sales
-------------- -------------- --------------
21 Est. Share Est - Redemptions ( ) ( ) ( )
-------------- -------------- --------------
22 Est. Share Est - Reinvestments
-------------- -------------- --------------
23 Adj Shares Outstanding GL Total =
-------------- -------------- --------------
24 S/R Unsettled Sales CS80A ( ) CS80B ( ) CS80C ( )
-------------- -------------- --------------
25 S/R Unsettled Redemptions CS90A CS90B CS90C
-------------- -------------- --------------
26 Current Distribution Shares GL Total
-------------- -------------- --------------
TOTAL OUTSTANDING SHARES A+B+C
==============================
DIVIDENDS AND DISTRIBUTIONS
27 S/R T/A Reported Amount
-------------- -------------- --------------
28 P/D Estimate Div.
-------------- -------------- --------------
29 Tie-in Adjustment Needed
-------------- -------------- --------------
30 Current Day's Total Dividend **
** Line 23 or 25 X Line 31 ============== ============== ==============
31 Dividend Rate
-------------- -------------- --------------
</TABLE>
<PAGE> 82
DAILY NET ASSET RECONCILIATION AND NAV PROOF Page 4
FUND____________________ DATE__________________
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
Line Report Activity Long Positions Short Positions
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Par/Shares Cost Par/Shares Cost
1 P/D R104 Prior Day's Total Par/Shares & Cost + +
----------- ----------- ------------ ------------
2 Trade Tkts Purchases - L/I Inv + +
----------- ----------- ------------ ------------
3 Trade Tkts Purchases - S/I Inv + +
----------- ----------- ------------ ------------
4 Trade Tkts Opening Contracts + +
----------- ----------- ------------ ------------
5 R303 Sales - -
----------- ----------- ------------ ------------
6 P/D R104 Maturities - -
----------- ----------- ------------ ------------
7 R302 Closing Contracts - -
----------- ----------- ------------ ------------
8 R104 Current Day's Total Par/Shares & Cost = =
----------- ----------- ------------ ------------
9 R301/04/05 Capital Change Impact +
----------- ----------- ------------ ------------
10 Bond Tkts Correcting Adjustments +/- +/-
----------- ----------- ------------ ------------
11 R104 Rev. Revised Par/Shares & Cost = =
----------- ----------- ------------ ------------
12 R104 Subtract Futures Par & Cost - -
----------- ----------- ------------ ------------
13 Total Par & Cost = =
=========== =========== ============ ============
G/L Acct G/L Acct
GENERAL LEDGER COST RECONCILIATION
12 R701 Investments at Cost/Written Options AS10 + LS10 +
----------- ------------
13 R701 Short-term Investments (cost) AS70 +
-----------
14 R701 Short Securities LS20 +
----------- ----------- ------------
16 Total Reconciled Cost Above (Line 13) = =
=========== ============
17 Proof of R403 Par/Shares
-----------
Prepared by Reviewer's Initials
-------------------------------
</TABLE>
<PAGE> 83
Exhibit C-2
AMERICAN CAPITAL COMPANIES, INC.
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
REPORT IDENTIFIER: NAV-P
NAV WORKSHEET FOR TOTAL FUND
- - ----------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
DISTRIBUTION FEES
SERVICE FEES
OTHER EXPENSES
NET ADJUSTMENT TO EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
FOR STATISTICAL USE ONLY
------------------------
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
NET ASSETS FOR TOTAL FUND PER NAV WORKSHEET
NET ASSETS FOR TOTAL FUND PER R403
- - ---- DIFFERENCE
<PAGE> 84
AMERICAN CAPITAL COMPANIES, INC.
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
NAV WORKSHEET FOR CLASS A SHARES
- - --------------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
SERVICE FEES
OTHER EXPENSES
NET ADJUSTMENT TO CLASS A EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
CLASS A FRONT-END LOAD FACTOR (1 - LOAD)
MAXIMUM OFFERING PRICE (CLASS A)
NET ASSETS FOR CLASS A PER NAV WORKSHEET
NET ASSETS FOR CLASS A PER R403
- - ---- DIFFERENCE
<PAGE> 85
AMERICAN CAPITAL COMPANIES, INC.
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
NAV WORKSHEET FOR CLASS B SHARES
- - --------------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
DISTRIBUTION FEES
SERVICE FEES
OTHER EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
CLASS B FRONT-END LOAD FACTOR (1 - LOAD)
MAXIMUM OFFERING PRICE (CLASS B)
NET ASSETS FOR CLASS B PER NAV WORKSHEET
NET ASSETS FOR CLASS B PER R403
- - ---- DIFFERENCE
<PAGE> 86
AMERICAN CAPITAL COMPANIES, INC.
REPORT # R707
NAV-P MULTIPLE SHARES NAV WORKSHEET - PERIODIC DIVIDEND FUND
FOR THE PERIOD 10/12/93 THROUGH 10/13/93
NAV WORKSHEET FOR CLASS C SHARES
- - --------------------------------
NET ASSETS - PRIOR DAY
CAPITAL STOCK ACTIVITY AS OF PRIOR DAY
ADJUSTED NET ASSETS
CLASS ALLOCATION ON ADJUSTED NET ASSETS
NET INVESTMENT INCOME:
GROSS INVESTMENT INCOME
EXPENSES:
DISTRIBUTION FEES
SERVICE FEES
OTHER EXPENSES
NET EXPENSES
NET INVESTMENT INCOME
UNDISTRIBUTED INCOME - PRIOR DAY
INCOME AVAILABLE FOR DISTRIBUTION
INCOME AVAILABLE PER SHARE
DIVIDENDS DECLARED
GAINS DISTRIBUTIONS DECLARED
GAINS/LOSSES - ALLOCATED ON ADJUSTED NET ASSETS:
NET REALIZED GAINS/LOSSES
NET UNREALIZED GAINS/LOSSES
INCREASE/DECREASE IN NET ASSETS
NET ASSETS - CURRENT DAY
CAPITAL SHARES OUTSTANDING CURRENT DAY
NAV PER SHARE:
UNROUNDED
ROUNDED
PRIOR DAY NAV - ROUNDED
CHANGE IN NAV (CENTS)
CLASS C FRONT-END LOAD FACTOR (1 - LOAD)
MAXIMUM OFFERING PRICE (CLASS C)
NET ASSETS FOR CLASS C PER NAV WORKSHEET
NET ASSETS FOR CLASS C PER R403
- - ---- DIFFERENCE
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000783743
<NAME> AC FMT - A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 73544
<INVESTMENTS-AT-VALUE> 72638
<RECEIVABLES> 453
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 73100
<PAYABLE-FOR-SECURITIES> 7026
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 641
<TOTAL-LIABILITIES> 7667
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 82620
<SHARES-COMMON-STOCK> 3466
<SHARES-COMMON-PRIOR> 5178
<ACCUMULATED-NII-CURRENT> 50
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16373)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (919)
<NET-ASSETS> 65433
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4961
<OTHER-INCOME> 0
<EXPENSES-NET> 1192
<NET-INVESTMENT-INCOME> 3769
<REALIZED-GAINS-CURRENT> (2512)
<APPREC-INCREASE-CURRENT> (1405)
<NET-CHANGE-FROM-OPS> (148)
<EQUALIZATION> (170)
<DISTRIBUTIONS-OF-INCOME> 2394
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1589
<NUMBER-OF-SHARES-REDEEMED> 3432
<SHARES-REINVESTED> 130
<NET-CHANGE-IN-ASSETS> (32860)
<ACCUMULATED-NII-PRIOR> (136)
<ACCUMULATED-GAINS-PRIOR> (14110)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 608
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1663
<AVERAGE-NET-ASSETS> 54300
<PER-SHARE-NAV-BEGIN> 12.42
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> (0.482)
<PER-SHARE-DIVIDEND> 0.538
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.90
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000783743
<NAME> AC FMT - B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1542
<SHARES-COMMON-PRIOR> 2167
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 807
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 340
<NUMBER-OF-SHARES-REDEEMED> 1011
<SHARES-REINVESTED> 45
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 22200
<PER-SHARE-NAV-BEGIN> 12.43
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (0.498)
<PER-SHARE-DIVIDEND> 0.442
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.91
<EXPENSE-RATIO> 1.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000783743
<NAME> AC FMT - C
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 491
<SHARES-COMMON-PRIOR> 568
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 276
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 470
<NUMBER-OF-SHARES-REDEEMED> 557
<SHARES-REINVESTED> 10
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 7600
<PER-SHARE-NAV-BEGIN> 12.41
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (0.518)
<PER-SHARE-DIVIDEND> 0.442
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.90
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
